L&K Engineering (Suzhou)Ltd (SHSE:603929) has had a great run on the share market with its stock up by a significant 23% over the last three months. 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. Particularly, we will be paying attention to L&K Engineering (Suzhou)Ltd's ROE today.

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 To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for L&K Engineering (Suzhou)Ltd is:

24% = CN¥376m ÷ CN¥1.6b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.24 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

L&K Engineering (Suzhou)Ltd's Earnings Growth And 24% ROE

To begin with, L&K Engineering (Suzhou)Ltd has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 7.3% also doesn't go unnoticed by us. Under the circumstances, L&K Engineering (Suzhou)Ltd's considerable five year net income growth of 36% was to be expected.

We then compared L&K Engineering (Suzhou)Ltd'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 7.8% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 L&K Engineering (Suzhou)Ltd is trading on a high P/E or a low P/E, relative to its industry.

Is L&K Engineering (Suzhou)Ltd Using Its Retained Earnings Effectively?

L&K Engineering (Suzhou)Ltd has a three-year median payout ratio of 29% (where it is retaining 71% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and L&K Engineering (Suzhou)Ltd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, L&K Engineering (Suzhou)Ltd has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with L&K Engineering (Suzhou)Ltd'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.

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