With its stock down 15% over the past month, it is easy to disregard Western Superconducting Technologies (SHSE:688122). However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Western Superconducting Technologies' ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Western Superconducting Technologies is:

9.5% = CN¥662m ÷ CN¥7.0b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.09.

Why Is ROE Important For 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. 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.

Western Superconducting Technologies' Earnings Growth And 9.5% ROE

When you first look at it, Western Superconducting Technologies' ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 7.4%, is definitely interesting. Particularly, the substantial 33% net income growth seen by Western Superconducting Technologies 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.

As a next step, we compared Western Superconducting Technologies' 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 12%.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Western Superconducting Technologies is trading on a high P/E or a low P/E, relative to its industry.

Is Western Superconducting Technologies Making Efficient Use Of Its Profits?

The three-year median payout ratio for Western Superconducting Technologies is 46%, which is moderately low. The company is retaining the remaining 54%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Western Superconducting Technologies is reinvesting its earnings efficiently.

Additionally, Western Superconducting Technologies has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Western Superconducting Technologies' performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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.

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