Most readers would already be aware that Lingyi iTech (Guangdong)'s (SZSE:002600) stock increased significantly by 13% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Lingyi iTech (Guangdong)'s ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Lingyi iTech (Guangdong)

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 Lingyi iTech (Guangdong) is:

12% = CN¥2.2b ÷ CN¥18b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.12.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Lingyi iTech (Guangdong)'s Earnings Growth And 12% ROE

To start with, Lingyi iTech (Guangdong)'s ROE looks acceptable. On comparing with the average industry ROE of 6.6% the company's ROE looks pretty remarkable. This probably laid the ground for Lingyi iTech (Guangdong)'s significant 21% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Lingyi iTech (Guangdong)'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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Lingyi iTech (Guangdong) is trading on a high P/E or a low P/E, relative to its industry.

Is Lingyi iTech (Guangdong) Making Efficient Use Of Its Profits?

The three-year median payout ratio for Lingyi iTech (Guangdong) is 44%, which is moderately low. The company is retaining the remaining 56%. So it seems that Lingyi iTech (Guangdong) is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Lingyi iTech (Guangdong) has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Lingyi iTech (Guangdong)'s performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.