Wuxi Hongsheng Heat Exchanger Manufacturing's (SHSE:603090) stock is up by a considerable 28% over the past week. 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. In this article, we decided to focus on Wuxi Hongsheng Heat Exchanger Manufacturing's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How To 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 Wuxi Hongsheng Heat Exchanger Manufacturing is:

12% = CN¥69m ÷ CN¥579m (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.12.

What Is The Relationship Between ROE And 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Wuxi Hongsheng Heat Exchanger Manufacturing's Earnings Growth And 12% ROE

To begin with, Wuxi Hongsheng Heat Exchanger Manufacturing seems to have a respectable ROE. On comparing with the average industry ROE of 7.6% the company's ROE looks pretty remarkable. This probably laid the ground for Wuxi Hongsheng Heat Exchanger Manufacturing's moderate 18% net income growth seen over the past five years.

We then compared Wuxi Hongsheng Heat Exchanger Manufacturing's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same 5-year period.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Wuxi Hongsheng Heat Exchanger Manufacturing's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wuxi Hongsheng Heat Exchanger Manufacturing Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 57% (or a retention ratio of 43%) for Wuxi Hongsheng Heat Exchanger Manufacturing suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Wuxi Hongsheng Heat Exchanger Manufacturing has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Wuxi Hongsheng Heat Exchanger Manufacturing's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Wuxi Hongsheng Heat Exchanger Manufacturing and see how it has performed in the past by looking at this FREE detailed graph 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.