Ningbo Deye Technology Group (SHSE:605117) has had a rough three months with its share price down 9.7%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Ningbo Deye Technology Group'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Ningbo Deye Technology Group is:

26% = CN¥2.5b ÷ CN¥9.4b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.26 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Ningbo Deye Technology Group's Earnings Growth And 26% ROE

First thing first, we like that Ningbo Deye Technology Group has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 6.3% also doesn't go unnoticed by us. So, the substantial 42% net income growth seen by Ningbo Deye Technology Group over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Ningbo Deye Technology Group's growth is quite high when compared to the industry average growth of 7.4% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. What is 605117 worth today? The intrinsic value infographic in our free research report helps visualize whether 605117 is currently mispriced by the market.

Is Ningbo Deye Technology Group Making Efficient Use Of Its Profits?

The three-year median payout ratio for Ningbo Deye Technology Group is 33%, which is moderately low. The company is retaining the remaining 67%. So it seems that Ningbo Deye Technology Group is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Ningbo Deye Technology Group has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 46% over the next three years. However, Ningbo Deye Technology Group's future ROE is expected to rise to 33% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Summary

On the whole, we feel that Ningbo Deye Technology Group'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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.