Luoyang Xinqianglian Slewing Bearing (SZSE:300850) has had a great run on the share market with its stock up by a significant 28% over the last week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Luoyang Xinqianglian Slewing Bearing'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You Calculate Return On Equity?

Return on equity 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 Luoyang Xinqianglian Slewing Bearing is:

5.7% = CN¥294m ÷ CN¥5.1b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.06 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Luoyang Xinqianglian Slewing Bearing's Earnings Growth And 5.7% ROE

On the face of it, Luoyang Xinqianglian Slewing Bearing's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.8%. On the other hand, Luoyang Xinqianglian Slewing Bearing reported a moderate 5.6% net income growth over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Luoyang Xinqianglian Slewing Bearing'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 9.5% in the same 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 Luoyang Xinqianglian Slewing Bearing's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Luoyang Xinqianglian Slewing Bearing Efficiently Re-investing Its Profits?

Luoyang Xinqianglian Slewing Bearing has a low three-year median payout ratio of 9.5%, meaning that the company retains the remaining 90% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, Luoyang Xinqianglian Slewing Bearing has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we do feel that Luoyang Xinqianglian Slewing Bearing has some positive attributes. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com