BOE Varitronix's (HKG:710) stock is up by a considerable 18% over the past week. 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. In this article, we decided to focus on BOE Varitronix's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. 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 return on equity is:

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

So, based on the above formula, the ROE for BOE Varitronix is:

10% = HK$454m ÷ HK$4.4b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.10 in profit.

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.

BOE Varitronix's Earnings Growth And 10% ROE

To start with, BOE Varitronix's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 7.6%. This certainly adds some context to BOE Varitronix's exceptional 45% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that BOE Varitronix's growth is quite high when compared to the industry average growth of 5.1% in the same period, which is great to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about BOE Varitronix's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is BOE Varitronix Making Efficient Use Of Its Profits?

The three-year median payout ratio for BOE Varitronix is 31%, which is moderately low. The company is retaining the remaining 69%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like BOE Varitronix is reinvesting its earnings efficiently.

Additionally, BOE Varitronix has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 29%. Regardless, the future ROE for BOE Varitronix is predicted to rise to 13% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we are quite pleased with BOE Varitronix's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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