Most readers would already be aware that Shenzhen Kaizhong Precision Technology's (SZSE:002823) stock increased significantly by 14% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Shenzhen Kaizhong Precision 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 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 Shenzhen Kaizhong Precision Technology is:

9.1% = CN¥148m ÷ CN¥1.6b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.09.

Why Is ROE Important For 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. 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.

Shenzhen Kaizhong Precision Technology's Earnings Growth And 9.1% ROE

At first glance, Shenzhen Kaizhong Precision Technology's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 7.0%, is definitely interesting. Still, Shenzhen Kaizhong Precision Technology has seen a flat net income growth over the past five years. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the flat earnings growth.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 12% over the last few years.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shenzhen Kaizhong Precision Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shenzhen Kaizhong Precision Technology Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 26% (meaning the company retains74% of profits) in the last three-year period, Shenzhen Kaizhong Precision Technology's earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Shenzhen Kaizhong Precision Technology has paid dividends over a period of six years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, it does look like Shenzhen Kaizhong Precision Technology has some positive aspects to its business. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Shenzhen Kaizhong Precision Technology's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.