With its stock down 19% over the past three months, it is easy to disregard Eaglerise Electric & Electronic (China) (SZSE:002922). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Eaglerise Electric & Electronic (China)'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?

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 Eaglerise Electric & Electronic (China) is:

8.4% = CN¥268m ÷ CN¥3.2b (Based on the trailing twelve months to September 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¥0.08.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of Eaglerise Electric & Electronic (China)'s Earnings Growth And 8.4% ROE

On the face of it, Eaglerise Electric & Electronic (China)'s ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 6.4% which we definitely can't overlook. Particularly, the substantial 29% net income growth seen by Eaglerise Electric & Electronic (China) over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence, there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

We then compared Eaglerise Electric & Electronic (China)'s net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 10% in the same 5-year period.

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. Is 002922 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Eaglerise Electric & Electronic (China) Efficiently Re-investing Its Profits?

Eaglerise Electric & Electronic (China) has a three-year median payout ratio of 39% (where it is retaining 61% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Eaglerise Electric & Electronic (China) is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Eaglerise Electric & Electronic (China) has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Eaglerise Electric & Electronic (China)'s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.