With its stock down 14% over the past three months, it is easy to disregard Hengdian Group DMEGC Magnetics Ltd (SZSE:002056). However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Hengdian Group DMEGC Magnetics Ltd'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 Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Hengdian Group DMEGC Magnetics Ltd is:

18% = CN¥1.6b ÷ CN¥9.0b (Based on the trailing twelve months to March 2024).

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¥0.18.

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. 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.

Hengdian Group DMEGC Magnetics Ltd's Earnings Growth And 18% ROE

At first glance, Hengdian Group DMEGC Magnetics Ltd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.3%. This certainly adds some context to Hengdian Group DMEGC Magnetics Ltd's exceptional 24% net income growth seen over the past five years. However, there could also be other causes behind this 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.

We then compared Hengdian Group DMEGC Magnetics 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 6.4% in the same 5-year period.

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. If you're wondering about Hengdian Group DMEGC Magnetics Ltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hengdian Group DMEGC Magnetics Ltd Efficiently Re-investing Its Profits?

Hengdian Group DMEGC Magnetics Ltd's three-year median payout ratio is a pretty moderate 30%, meaning the company retains 70% of its income. So it seems that Hengdian Group DMEGC Magnetics Ltd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Hengdian Group DMEGC Magnetics Ltd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 33%. As a result, Hengdian Group DMEGC Magnetics Ltd's ROE is not expected to change by much either, which we inferred from the analyst estimate of 18% for future ROE.

Summary

On the whole, we feel that Hengdian Group DMEGC Magnetics Ltd'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. 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.

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