Huaming Power EquipmentLtd's (SZSE:002270) stock up by 7.3% over the past three months. Since the market usually pay for a company's long-term financial health, we decided to study the company's fundamentals to see if they could be influencing the market. In this article, we decided to focus on Huaming Power EquipmentLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Huaming Power EquipmentLtd

How Is ROE Calculated?

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 Huaming Power EquipmentLtd is:

14% = CN¥468m ÷ CN¥3.4b (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.14 in profit.

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. 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. 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.

Huaming Power EquipmentLtd's Earnings Growth And 14% ROE

To start with, Huaming Power EquipmentLtd's ROE looks acceptable. On comparing with the average industry ROE of 7.8% the company's ROE looks pretty remarkable. Probably as a result of this, Huaming Power EquipmentLtd was able to see a decent growth of 17% over the last five years.

As a next step, we compared Huaming Power EquipmentLtd'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 11%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is 002270 worth today? The intrinsic value infographic in our free research report helps visualize whether 002270 is currently mispriced by the market.

Is Huaming Power EquipmentLtd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 52% (or a retention ratio of 48%) for Huaming Power EquipmentLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Huaming Power EquipmentLtd has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Huaming Power EquipmentLtd's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. 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.

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.