LinhaiLtd's (SHSE:600099) stock is up by a considerable 33% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on LinhaiLtd's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for LinhaiLtd

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 LinhaiLtd is:

2.5% = CN¥13m ÷ CN¥507m (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.03.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

LinhaiLtd's Earnings Growth And 2.5% ROE

As you can see, LinhaiLtd's ROE looks pretty weak. Even when compared to the industry average of 7.7%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that LinhaiLtd grew its net income at a significant rate of 29% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that LinhaiLtd's growth is quite high when compared to the industry average growth of 23% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about LinhaiLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is LinhaiLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 68% (implying that it keeps only 32% of profits) for LinhaiLtd suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

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

Summary

In total, it does look like LinhaiLtd has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of LinhaiLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.