Qingdao Tianneng Heavy IndustriesLtd (SZSE:300569) has had a rough three months with its share price down 28%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Qingdao Tianneng Heavy IndustriesLtd's ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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 Qingdao Tianneng Heavy IndustriesLtd is:

4.9% = CN¥278m ÷ CN¥5.7b (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¥0.05 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 Qingdao Tianneng Heavy IndustriesLtd's Earnings Growth And 4.9% ROE

It is hard to argue that Qingdao Tianneng Heavy IndustriesLtd's ROE is much good in and of itself. Even compared to the average industry ROE of 7.1%, the company's ROE is quite dismal. Although, we can see that Qingdao Tianneng Heavy IndustriesLtd saw a modest net income growth of 12% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Qingdao Tianneng Heavy IndustriesLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Qingdao Tianneng Heavy IndustriesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Qingdao Tianneng Heavy IndustriesLtd Making Efficient Use Of Its Profits?

Qingdao Tianneng Heavy IndustriesLtd has a three-year median payout ratio of 27%, which implies that it retains the remaining 73% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Qingdao Tianneng Heavy IndustriesLtd has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Qingdao Tianneng Heavy IndustriesLtd has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Qingdao Tianneng Heavy IndustriesLtd visit our risks dashboard for free.

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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.