Guangzhou Shiyuan Electronic Technology (SZSE:002841) has had a rough three months with its share price down 30%. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Guangzhou Shiyuan Electronic Technology's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Guangzhou Shiyuan Electronic Technology

How Do You 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 Guangzhou Shiyuan Electronic Technology is:

12% = CN¥1.6b ÷ CN¥13b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 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. 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.

Guangzhou Shiyuan Electronic Technology's Earnings Growth And 12% ROE

At first glance, Guangzhou Shiyuan Electronic Technology seems to have a decent ROE. Especially when compared to the industry average of 7.4% the company's ROE looks pretty impressive. This certainly adds some context to Guangzhou Shiyuan Electronic Technology's decent 11% net income growth seen over the past five years.

Next, on comparing Guangzhou Shiyuan Electronic Technology's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 12% over the last few years.

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). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 002841? You can find out in our latest intrinsic value infographic research report.

Is Guangzhou Shiyuan Electronic Technology Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 34% (implying that the company retains 66% of its profits), it seems that Guangzhou Shiyuan Electronic Technology is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Guangzhou Shiyuan Electronic Technology is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Summary

Overall, we are quite pleased with Guangzhou Shiyuan Electronic Technology'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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.