With its stock down 23% over the past month, it is easy to disregard Keli Sensing Technology (Ningbo)Ltd (SHSE:603662). However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Keli Sensing Technology (Ningbo)Ltd's ROE.

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.

How Is ROE Calculated?

Return on equity 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 Keli Sensing Technology (Ningbo)Ltd is:

11% = CN¥298m ÷ CN¥2.6b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Keli Sensing Technology (Ningbo)Ltd's Earnings Growth And 11% ROE

To begin with, Keli Sensing Technology (Ningbo)Ltd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.2%. This probably laid the ground for Keli Sensing Technology (Ningbo)Ltd's moderate 13% net income growth seen over the past five years.

Next, on comparing Keli Sensing Technology (Ningbo)Ltd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Keli Sensing Technology (Ningbo)Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Keli Sensing Technology (Ningbo)Ltd Making Efficient Use Of Its Profits?

Keli Sensing Technology (Ningbo)Ltd has a three-year median payout ratio of 29%, which implies that it retains the remaining 71% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Keli Sensing Technology (Ningbo)Ltd has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Keli Sensing Technology (Ningbo)Ltd'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. 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.