Olympic Circuit Technology (SHSE:603920) has had a great run on the share market with its stock up by a significant 16% over the last week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Olympic Circuit Technology's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You Calculate Return On Equity?

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 Olympic Circuit Technology is:

14% = CN¥481m ÷ CN¥3.3b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.14 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Olympic Circuit Technology's Earnings Growth And 14% ROE

To begin with, Olympic Circuit Technology seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.7%. Probably as a result of this, Olympic Circuit Technology was able to see a decent growth of 13% over the last five years.

We then performed a comparison between Olympic Circuit Technology's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 11% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Olympic Circuit Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Olympic Circuit Technology Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 87% (or a retention ratio of 13%) for Olympic Circuit Technology suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Olympic Circuit Technology has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Olympic Circuit Technology's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.