Most readers would already be aware that Zhejiang Jinghua Laser TechnologyLtd's (SHSE:603607) stock increased significantly by 37% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Zhejiang Jinghua Laser TechnologyLtd's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How To Calculate Return On Equity?

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 Zhejiang Jinghua Laser TechnologyLtd is:

10% = CN¥107m ÷ CN¥1.0b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.10 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Zhejiang Jinghua Laser TechnologyLtd's Earnings Growth And 10% ROE

On the face of it, Zhejiang Jinghua Laser TechnologyLtd's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 5.9% doesn't go unnoticed by us. However, Zhejiang Jinghua Laser TechnologyLtd has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to stay flat.

We then compared Zhejiang Jinghua Laser TechnologyLtd's net income growth with the industry and found that the average industry growth rate was 4.6% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Zhejiang Jinghua Laser TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Jinghua Laser TechnologyLtd Using Its Retained Earnings Effectively?

Zhejiang Jinghua Laser TechnologyLtd has a high three-year median payout ratio of 75% (or a retention ratio of 25%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Additionally, Zhejiang Jinghua Laser TechnologyLtd has paid dividends over a period of seven years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we feel that the performance shown by Zhejiang Jinghua Laser TechnologyLtd can be open to many interpretations. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Zhejiang Jinghua Laser TechnologyLtd'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.