It is hard to get excited after looking at Sichuan Furong Technology's (SHSE:603327) recent performance, when its stock has declined 24% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Sichuan Furong Technology'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Sichuan Furong Technology is:

16% = CN¥309m ÷ CN¥2.0b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.16 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Sichuan Furong Technology's Earnings Growth And 16% ROE

To begin with, Sichuan Furong Technology seems to have a respectable ROE. On comparing with the average industry ROE of 7.0% the company's ROE looks pretty remarkable. This certainly adds some context to Sichuan Furong Technology's decent 13% net income growth seen over the past five years.

We then performed a comparison between Sichuan Furong Technology's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 13% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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. 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 Sichuan Furong Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Sichuan Furong Technology Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 51% (or a retention ratio of 49%) for Sichuan Furong Technology suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Sichuan Furong Technology has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Sichuan Furong Technology's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.