With its stock down 15% over the past three months, it is easy to disregard Triumph Science & TechnologyLtd (SHSE:600552). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company's financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Triumph Science & TechnologyLtd'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Triumph Science & TechnologyLtd is:

3.7% = CN¥172m ÷ CN¥4.6b (Based on the trailing twelve months to September 2024).

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¥0.04 in profit.

What Is The Relationship Between ROE And 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 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.

Triumph Science & TechnologyLtd's Earnings Growth And 3.7% ROE

It is quite clear that Triumph Science & TechnologyLtd's ROE is rather low. Even compared to the average industry ROE of 6.3%, the company's ROE is quite dismal. Therefore, the disappointing ROE therefore provides a background to Triumph Science & TechnologyLtd's very little net income growth of 2.2% over the past five years.

We then compared Triumph Science & TechnologyLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 3.9% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Triumph Science & TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Triumph Science & TechnologyLtd Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 37% (implying that the company retains the remaining 63% of its income), Triumph Science & TechnologyLtd's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Triumph Science & TechnologyLtd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 28% over the next three years. As a result, the expected drop in Triumph Science & TechnologyLtd's payout ratio explains the anticipated rise in the company's future ROE to 7.1%, over the same period.

Conclusion

On the whole, we feel that the performance shown by Triumph Science & TechnologyLtd can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.