With its stock down 12% over the past month, it is easy to disregard Luoyang Xinqianglian Slewing Bearing (SZSE:300850). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Luoyang Xinqianglian Slewing Bearing's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Luoyang Xinqianglian Slewing Bearing

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Luoyang Xinqianglian Slewing Bearing is:

7.1% = CN¥341m ÷ CN¥4.8b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 in profit.

What Has ROE Got To Do With 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. 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.

Luoyang Xinqianglian Slewing Bearing's Earnings Growth And 7.1% ROE

On the face of it, Luoyang Xinqianglian Slewing Bearing's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 7.5%, we may spare it some thought. On the other hand, Luoyang Xinqianglian Slewing Bearing reported a moderate 16% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Luoyang Xinqianglian Slewing Bearing'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 12%.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Luoyang Xinqianglian Slewing Bearing is trading on a high P/E or a low P/E, relative to its industry.

Is Luoyang Xinqianglian Slewing Bearing Using Its Retained Earnings Effectively?

Luoyang Xinqianglian Slewing Bearing's three-year median payout ratio to shareholders is 9.4% (implying that it retains 91% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Luoyang Xinqianglian Slewing Bearing is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Conclusion

On the whole, we do feel that Luoyang Xinqianglian Slewing Bearing has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.