Zhuzhou Huarui Precision Cutting ToolsLtd (SHSE:688059) has had a great run on the share market with its stock up by a significant 15% over the last week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Zhuzhou Huarui Precision Cutting ToolsLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Zhuzhou Huarui Precision Cutting ToolsLtd

How To 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 Zhuzhou Huarui Precision Cutting ToolsLtd is:

14% = CN¥165m ÷ CN¥1.2b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.14 in profit.

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 Zhuzhou Huarui Precision Cutting ToolsLtd's Earnings Growth And 14% ROE

To start with, Zhuzhou Huarui Precision Cutting ToolsLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 7.5%. This certainly adds some context to Zhuzhou Huarui Precision Cutting ToolsLtd's decent 19% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Zhuzhou Huarui Precision Cutting ToolsLtd's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Zhuzhou Huarui Precision Cutting ToolsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhuzhou Huarui Precision Cutting ToolsLtd Making Efficient Use Of Its Profits?

Zhuzhou Huarui Precision Cutting ToolsLtd has a healthy combination of a moderate three-year median payout ratio of 32% (or a retention ratio of 68%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, Zhuzhou Huarui Precision Cutting ToolsLtd has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Zhuzhou Huarui Precision Cutting ToolsLtd'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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.