Ningbo Henghe Precision IndustryLtd (SZSE:300539) has had a great run on the share market with its stock up by a significant 27% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Ningbo Henghe Precision IndustryLtd's ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How To Calculate Return On Equity?

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 Ningbo Henghe Precision IndustryLtd is:

5.2% = CN¥28m ÷ CN¥539m (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

What Has ROE Got To Do With 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.

Ningbo Henghe Precision IndustryLtd's Earnings Growth And 5.2% ROE

On the face of it, Ningbo Henghe Precision IndustryLtd'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 6.4%. Moreover, we are quite pleased to see that Ningbo Henghe Precision IndustryLtd's net income grew significantly at a rate of 31% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving 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.

Next, on comparing with the industry net income growth, we found that Ningbo Henghe Precision IndustryLtd's growth is quite high when compared to the industry average growth of 6.3% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. Is Ningbo Henghe Precision IndustryLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ningbo Henghe Precision IndustryLtd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 62% (implying that it keeps only 38% of profits) for Ningbo Henghe Precision IndustryLtd suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Ningbo Henghe Precision IndustryLtd has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that Ningbo Henghe Precision IndustryLtd certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Ningbo Henghe Precision IndustryLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.