It is hard to get excited after looking at Chemclin Diagnostics' (SHSE:688468) recent performance, when its stock has declined 19% over the past month. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Chemclin Diagnostics' 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Chemclin Diagnostics

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Chemclin Diagnostics is:

11% = CN¥155m ÷ CN¥1.4b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Chemclin Diagnostics' Earnings Growth And 11% ROE

To start with, Chemclin Diagnostics' ROE looks acceptable. Especially when compared to the industry average of 9.3% the company's ROE looks pretty impressive. This probably laid the ground for Chemclin Diagnostics' significant 45% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Chemclin Diagnostics' 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 16%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Chemclin Diagnostics fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chemclin Diagnostics Using Its Retained Earnings Effectively?

Chemclin Diagnostics' significant three-year median payout ratio of 68% (where it is retaining only 32% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Along with seeing a growth in earnings, Chemclin Diagnostics only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

On the whole, we feel that Chemclin Diagnostics' performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Chemclin Diagnostics' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.