Shenzhen SDG ServiceLtd (SZSE:300917) has had a great run on the share market with its stock up by a significant 17% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Shenzhen SDG ServiceLtd'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How To 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 Shenzhen SDG ServiceLtd is:

11% = CN¥124m ÷ CN¥1.1b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.11.

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. 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.

A Side By Side comparison of Shenzhen SDG ServiceLtd's Earnings Growth And 11% ROE

To start with, Shenzhen SDG ServiceLtd's ROE looks acceptable. Especially when compared to the industry average of 5.5% the company's ROE looks pretty impressive. Probably as a result of this, Shenzhen SDG ServiceLtd was able to see a decent growth of 12% over the last five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Shenzhen SDG ServiceLtd compares quite favourably to the industry average, which shows a decline of 5.2% over the last few years.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Shenzhen SDG ServiceLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shenzhen SDG ServiceLtd Efficiently Re-investing Its Profits?

Shenzhen SDG ServiceLtd has a healthy combination of a moderate three-year median payout ratio of 29% (or a retention ratio of 71%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Shenzhen SDG ServiceLtd is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Summary

On the whole, we feel that Shenzhen SDG ServiceLtd's performance has been quite good. 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 2 risks we have identified for Shenzhen SDG ServiceLtd.

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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.