Chongqing Mas Sci.&Tech.Co.Ltd (SZSE:300275) has had a rough three months with its share price down 30%. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Chongqing Mas Sci.&Tech.Co.Ltd's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Chongqing Mas Sci.&Tech.Co.Ltd is:

5.8% = CN¥48m ÷ CN¥828m (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¥0.06 in profit.

What Is The Relationship Between ROE And 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. 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.

Chongqing Mas Sci.&Tech.Co.Ltd's Earnings Growth And 5.8% ROE

When you first look at it, Chongqing Mas Sci.&Tech.Co.Ltd's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 7.6%. In spite of this, Chongqing Mas Sci.&Tech.Co.Ltd was able to grow its net income considerably, at a rate of 48% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Chongqing Mas Sci.&Tech.Co.Ltd'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 11%.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Chongqing Mas Sci.&Tech.Co.Ltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chongqing Mas Sci.&Tech.Co.Ltd Efficiently Re-investing Its Profits?

Chongqing Mas Sci.&Tech.Co.Ltd's three-year median payout ratio to shareholders is 15%, which is quite low. This implies that the company is retaining 85% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Additionally, Chongqing Mas Sci.&Tech.Co.Ltd 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.

Summary

In total, it does look like Chongqing Mas Sci.&Tech.Co.Ltd has some positive aspects to its business. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.