Most readers would already be aware that Guangzhou KDT MachineryLtd's (SZSE:002833) stock increased significantly by 17% over the past three months. 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. Particularly, we will be paying attention to Guangzhou KDT MachineryLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Guangzhou KDT MachineryLtd is:

19% = CN¥570m ÷ CN¥3.0b (Based on the trailing twelve months to September 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¥0.19.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Guangzhou KDT MachineryLtd's Earnings Growth And 19% ROE

To begin with, Guangzhou KDT MachineryLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.3%. This probably laid the ground for Guangzhou KDT MachineryLtd's moderate 14% net income growth seen over the past five years.

As a next step, we compared Guangzhou KDT MachineryLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.3%.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Guangzhou KDT MachineryLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guangzhou KDT MachineryLtd Efficiently Re-investing Its Profits?

Guangzhou KDT MachineryLtd has a healthy combination of a moderate three-year median payout ratio of 37% (or a retention ratio of 63%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Guangzhou KDT MachineryLtd has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Guangzhou KDT MachineryLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.