Ningbo Sanxing Medical ElectricLtd (SHSE:601567) has had a great run on the share market with its stock up by a significant 10% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Ningbo Sanxing Medical ElectricLtd's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Ningbo Sanxing Medical ElectricLtd

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Ningbo Sanxing Medical ElectricLtd is:

16% = CN¥1.7b ÷ CN¥11b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.16 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Ningbo Sanxing Medical ElectricLtd's Earnings Growth And 16% ROE

At first glance, Ningbo Sanxing Medical ElectricLtd seems to have a decent ROE. Especially when compared to the industry average of 7.2% the company's ROE looks pretty impressive. This probably laid the ground for Ningbo Sanxing Medical ElectricLtd's moderate 9.0% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Ningbo Sanxing Medical ElectricLtd's reported growth was lower than the industry growth of 14% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is 601567 worth today? The intrinsic value infographic in our free research report helps visualize whether 601567 is currently mispriced by the market.

Is Ningbo Sanxing Medical ElectricLtd Using Its Retained Earnings Effectively?

Ningbo Sanxing Medical ElectricLtd has a significant three-year median payout ratio of 52%, meaning that it is left with only 48% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Ningbo Sanxing Medical ElectricLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we feel that Ningbo Sanxing Medical ElectricLtd certainly does have some positive factors to consider. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.