Shenzhen Pagoda Industrial (Group) (HKG:2411) has had a great run on the share market with its stock up by a significant 17% over the last three months. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Shenzhen Pagoda Industrial (Group)'s ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Shenzhen Pagoda Industrial (Group)

How Is ROE Calculated?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shenzhen Pagoda Industrial (Group) is:

10% = CN¥371m ÷ CN¥3.6b (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Shenzhen Pagoda Industrial (Group)'s Earnings Growth And 10% ROE

To begin with, Shenzhen Pagoda Industrial (Group) seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 9.1%. This probably goes some way in explaining Shenzhen Pagoda Industrial (Group)'s significant 23% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Shenzhen Pagoda Industrial (Group)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 2411 worth today? The intrinsic value infographic in our free research report helps visualize whether 2411 is currently mispriced by the market.

Is Shenzhen Pagoda Industrial (Group) Efficiently Re-investing Its Profits?

Shenzhen Pagoda Industrial (Group)'s three-year median payout ratio is a pretty moderate 32%, meaning the company retains 68% of its income. By the looks of it, the dividend is well covered and Shenzhen Pagoda Industrial (Group) is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Summary

In total, we are pretty happy with Shenzhen Pagoda Industrial (Group)'s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.