PowerTECH (SZSE:301369) has had a rough three months with its share price down 33%. Given that stock prices are usually driven by a company's fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Specifically, we decided to study PowerTECH's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for PowerTECH is:

2.6% = CN¥38m ÷ CN¥1.5b (Based on the trailing twelve months to September 2023).

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¥0.03.

What Has ROE Got To Do With 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.

PowerTECH's Earnings Growth And 2.6% ROE

It is quite clear that PowerTECH's ROE is rather low. Even when compared to the industry average of 6.4%, the ROE figure is pretty disappointing. PowerTECH was still able to see a decent net income growth of 15% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared PowerTECH's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 26% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is PowerTECH fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is PowerTECH Using Its Retained Earnings Effectively?

The really high three-year median payout ratio of 175% for PowerTECH suggests that the company is paying its shareholders more than what it is earning. Still the company's earnings have grown respectably. That being said, the high payout ratio could be worth keeping an eye on in case the company is unable to keep up its current growth momentum. You can see the 2 risks we have identified for PowerTECH by visiting our risks dashboard for free on our platform here.

Along with seeing a growth in earnings, PowerTECH only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning PowerTECH. While no doubt its earnings growth is pretty respectable, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, specially during troubled times. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of PowerTECH's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.