Shenzhen Sunnypol OptoelectronicsLtd's (SZSE:002876) stock is up by a considerable 21% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Shenzhen Sunnypol OptoelectronicsLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Shenzhen Sunnypol OptoelectronicsLtd

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 Shenzhen Sunnypol OptoelectronicsLtd is:

3.3% = CN¥78m ÷ CN¥2.4b (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¥0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Shenzhen Sunnypol OptoelectronicsLtd's Earnings Growth And 3.3% ROE

It is quite clear that Shenzhen Sunnypol OptoelectronicsLtd's ROE is rather low. Even compared to the average industry ROE of 6.6%, the company's ROE is quite dismal. Despite this, surprisingly, Shenzhen Sunnypol OptoelectronicsLtd saw an exceptional 30% net income growth over the past 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 Shenzhen Sunnypol OptoelectronicsLtd'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 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. 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 Shenzhen Sunnypol OptoelectronicsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Shenzhen Sunnypol OptoelectronicsLtd Using Its Retained Earnings Effectively?

Shenzhen Sunnypol OptoelectronicsLtd's three-year median payout ratio to shareholders is 17%, which is quite low. This implies that the company is retaining 83% of its profits. So it looks like Shenzhen Sunnypol OptoelectronicsLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Shenzhen Sunnypol OptoelectronicsLtd 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 feel that Shenzhen Sunnypol OptoelectronicsLtd certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.