Jiangsu Luokai Mechanical &Electrical (SHSE:603829) has had a great run on the share market with its stock up by a significant 23% over the last week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Jiangsu Luokai Mechanical &Electrical's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Jiangsu Luokai Mechanical &Electrical is:

14% = CN¥168m ÷ CN¥1.2b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Jiangsu Luokai Mechanical &Electrical's Earnings Growth And 14% ROE

To start with, Jiangsu Luokai Mechanical &Electrical's ROE looks acceptable. Especially when compared to the industry average of 6.3% the company's ROE looks pretty impressive. This probably laid the ground for Jiangsu Luokai Mechanical &Electrical's moderate 16% net income growth seen over the past five years.

We then compared Jiangsu Luokai Mechanical &Electrical'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 6.4% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Jiangsu Luokai Mechanical &Electrical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jiangsu Luokai Mechanical &Electrical Using Its Retained Earnings Effectively?

In Jiangsu Luokai Mechanical &Electrical's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 20% (or a retention ratio of 80%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Jiangsu Luokai Mechanical &Electrical has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we feel that Jiangsu Luokai Mechanical &Electrical's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 1 risk we have identified for Jiangsu Luokai Mechanical &Electrical visit our risks dashboard for free.

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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