It is hard to get excited after looking at Shanghai Hanbell Precise Machinery's (SZSE:002158) recent performance, when its stock has declined 21% over the past three months. 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. Particularly, we will be paying attention to Shanghai Hanbell Precise Machinery's ROE today.

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.

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 Shanghai Hanbell Precise Machinery is:

23% = CN¥897m ÷ CN¥3.9b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.23 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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Shanghai Hanbell Precise Machinery's Earnings Growth And 23% ROE

Firstly, we acknowledge that Shanghai Hanbell Precise Machinery has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 6.9% which is quite remarkable. Under the circumstances, Shanghai Hanbell Precise Machinery's considerable five year net income growth of 30% was to be expected.

As a next step, we compared Shanghai Hanbell Precise Machinery'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 9.5%.

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shanghai Hanbell Precise Machinery's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shanghai Hanbell Precise Machinery Using Its Retained Earnings Effectively?

Shanghai Hanbell Precise Machinery's three-year median payout ratio is a pretty moderate 36%, meaning the company retains 64% of its income. So it seems that Shanghai Hanbell Precise Machinery is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Shanghai Hanbell Precise Machinery has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 38%. As a result, Shanghai Hanbell Precise Machinery's ROE is not expected to change by much either, which we inferred from the analyst estimate of 21% for future ROE.

Summary

In total, we are pretty happy with Shanghai Hanbell Precise Machinery's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com