Most readers would already be aware that Tianjin Motor DiesLtd's (SZSE:002510) stock increased significantly by 67% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Tianjin Motor DiesLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Do You 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 Tianjin Motor DiesLtd is:

3.4% = CN¥74m ÷ CN¥2.2b (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¥0.03 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. 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.

Tianjin Motor DiesLtd's Earnings Growth And 3.4% ROE

It is hard to argue that Tianjin Motor DiesLtd's ROE is much good in and of itself. Even compared to the average industry ROE of 8.2%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Tianjin Motor DiesLtd grew its net income at a significant rate of 31% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Tianjin Motor DiesLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.0%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Tianjin Motor DiesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tianjin Motor DiesLtd Efficiently Re-investing Its Profits?

Tianjin Motor DiesLtd's three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. By the looks of it, the dividend is well covered and Tianjin Motor DiesLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Tianjin Motor DiesLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, it does look like Tianjin Motor DiesLtd has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings.

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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.