Universal Scientific Industrial (Shanghai) (SHSE:601231) has had a rough month with its share price down 1.4%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Universal Scientific Industrial (Shanghai)'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Universal Scientific Industrial (Shanghai)
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 Universal Scientific Industrial (Shanghai) is:
14% = CN¥2.3b ÷ CN¥16b (Based on the trailing twelve months to September 2023).
The 'return' is the income the business earned 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¥0.14 in profit.
What Is The Relationship Between ROE And 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.
A Side By Side comparison of Universal Scientific Industrial (Shanghai)'s Earnings Growth And 14% ROE
At first glance, Universal Scientific Industrial (Shanghai) seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.6%. This certainly adds some context to Universal Scientific Industrial (Shanghai)'s exceptional 20% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Universal Scientific Industrial (Shanghai)'s growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.
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. Is 601231 fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Universal Scientific Industrial (Shanghai) Using Its Retained Earnings Effectively?
The three-year median payout ratio for Universal Scientific Industrial (Shanghai) is 32%, which is moderately low. The company is retaining the remaining 68%. By the looks of it, the dividend is well covered and Universal Scientific Industrial (Shanghai) is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Additionally, Universal Scientific Industrial (Shanghai) has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
Conclusion
On the whole, we feel that Universal Scientific Industrial (Shanghai)'s performance has been quite good. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.
