Hefei Meyer Optoelectronic Technology (SZSE:002690) has had a great run on the share market with its stock up by a significant 21% over the last three months. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. Specifically, we decided to study Hefei Meyer Optoelectronic Technology's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Is ROE Calculated?

ROE 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 Hefei Meyer Optoelectronic Technology is:

25% = CN¥632m ÷ CN¥2.6b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.25 in profit.

Why Is ROE Important For 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.

A Side By Side comparison of Hefei Meyer Optoelectronic Technology's Earnings Growth And 25% ROE

First thing first, we like that Hefei Meyer Optoelectronic Technology has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 6.3% which is quite remarkable. Probably as a result of this, Hefei Meyer Optoelectronic Technology was able to see a decent net income growth of 9.1% over the last five years.

As a next step, we compared Hefei Meyer Optoelectronic 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 7.3%.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for 002690? You can find out in our latest intrinsic value infographic research report.

Is Hefei Meyer Optoelectronic Technology Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 86% (or a retention ratio of 14%) for Hefei Meyer Optoelectronic Technology suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Hefei Meyer Optoelectronic Technology has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 73% of its profits over the next three years. As a result, Hefei Meyer Optoelectronic Technology's ROE is not expected to change by much either, which we inferred from the analyst estimate of 27% for future ROE.

Conclusion

On the whole, we feel that Hefei Meyer Optoelectronic Technology's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. 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 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.