Fortior Technology (Shenzhen) (SHSE:688279) has had a great run on the share market with its stock up by a significant 31% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Fortior Technology (Shenzhen)'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To 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 Fortior Technology (Shenzhen) is:

9.4% = CN¥235m ÷ CN¥2.5b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.09 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.

Fortior Technology (Shenzhen)'s Earnings Growth And 9.4% ROE

When you first look at it, Fortior Technology (Shenzhen)'s ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 6.1%, is definitely interesting. Even more so after seeing Fortior Technology (Shenzhen)'s exceptional 24% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

We then compared Fortior Technology (Shenzhen)'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 14% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Fortior Technology (Shenzhen)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Fortior Technology (Shenzhen) Making Efficient Use Of Its Profits?

The three-year median payout ratio for Fortior Technology (Shenzhen) is 27%, which is moderately low. The company is retaining the remaining 73%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Fortior Technology (Shenzhen) is reinvesting its earnings efficiently.

Along with seeing a growth in earnings, Fortior Technology (Shenzhen) only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we are quite pleased with Fortior Technology (Shenzhen)'s performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.