Fujian Mindong Electric Power Limited's (SZSE:000993) stock is up by a considerable 36% over the past 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 Fujian Mindong Electric Power Limited'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Fujian Mindong Electric Power Limited is:

7.5% = CN¥186m ÷ CN¥2.5b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 in profit.

What Is The Relationship Between ROE And 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 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 Fujian Mindong Electric Power Limited's Earnings Growth And 7.5% ROE

When you first look at it, Fujian Mindong Electric Power Limited's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.7%. Looking at Fujian Mindong Electric Power Limited's exceptional 60% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Fujian Mindong Electric Power Limited's growth is quite high when compared to the industry average growth of 6.8% in the same period, which is great to see.

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. Is Fujian Mindong Electric Power Limited fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Fujian Mindong Electric Power Limited Efficiently Re-investing Its Profits?

The three-year median payout ratio for Fujian Mindong Electric Power Limited is 43%, which is moderately low. The company is retaining the remaining 57%. By the looks of it, the dividend is well covered and Fujian Mindong Electric Power Limited is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Fujian Mindong Electric Power Limited is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we do feel that Fujian Mindong Electric Power Limited has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Fujian Mindong Electric Power Limited.

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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.