Most readers would already be aware that Qingdao Gaoce Technology's (SHSE:688556) stock increased significantly by 10% over the past month. 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 Qingdao Gaoce Technology'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Qingdao Gaoce Technology is:

37% = CN¥1.5b ÷ CN¥4.1b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.37 in profit.

What Has ROE Got To Do With 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 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.

Qingdao Gaoce Technology's Earnings Growth And 37% ROE

Firstly, we acknowledge that Qingdao Gaoce Technology has a significantly high ROE. Secondly, even when compared to the industry average of 6.3% the company's ROE is quite impressive. Under the circumstances, Qingdao Gaoce Technology's considerable five year net income growth of 74% was to be expected.

As a next step, we compared Qingdao Gaoce Technology'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 26%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 688556 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Qingdao Gaoce Technology Efficiently Re-investing Its Profits?

Qingdao Gaoce Technology has a really low three-year median payout ratio of 11%, meaning that it has the remaining 89% left over to reinvest into its business. So it looks like Qingdao Gaoce Technology is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Qingdao Gaoce Technology has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 26% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 28%, over the same period.

Summary

Overall, we are quite pleased with Qingdao Gaoce Technology's performance. 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, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.