Fuyao Glass Industry Group's (SHSE:600660) stock is up by a considerable 13% over the past three months. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Fuyao Glass Industry Group's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You Calculate Return On Equity?

ROE 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 Fuyao Glass Industry Group is:

17% = CN¥5.0b ÷ CN¥30b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.17 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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.

Fuyao Glass Industry Group's Earnings Growth And 17% ROE

To begin with, Fuyao Glass Industry Group seems to have a respectable ROE. Especially when compared to the industry average of 7.3% the company's ROE looks pretty impressive. Probably as a result of this, Fuyao Glass Industry Group was able to see a decent growth of 6.8% over the last five years.

As a next step, we compared Fuyao Glass Industry Group's 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 3.8%.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is 600660 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Fuyao Glass Industry Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 68% (or a retention ratio of 32%) for Fuyao Glass Industry Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Fuyao Glass Industry Group 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 65%. As a result, Fuyao Glass Industry Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 20% for future ROE.

Summary

In total, we are pretty happy with Fuyao Glass Industry Group's performance. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.