With its stock down 23% over the past three months, it is easy to disregard Dianguang Explosion-proof TechnologyLtd (SZSE:002730). 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 Dianguang Explosion-proof TechnologyLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You 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 Dianguang Explosion-proof TechnologyLtd is:

7.4% = CN¥117m ÷ CN¥1.6b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.07 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Dianguang Explosion-proof TechnologyLtd's Earnings Growth And 7.4% ROE

On the face of it, Dianguang Explosion-proof TechnologyLtd's ROE is not much to talk about. However, its ROE is similar to the industry average of 7.1%, so we won't completely dismiss the company. Even so, Dianguang Explosion-proof TechnologyLtd has shown a fairly decent growth in its net income which grew at a rate of 16%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Dianguang Explosion-proof TechnologyLtd's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Dianguang Explosion-proof TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Dianguang Explosion-proof TechnologyLtd Making Efficient Use Of Its Profits?

Dianguang Explosion-proof TechnologyLtd has a three-year median payout ratio of 42%, which implies that it retains the remaining 58% 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.

Moreover, Dianguang Explosion-proof TechnologyLtd is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Summary

On the whole, we do feel that Dianguang Explosion-proof TechnologyLtd has some positive attributes. 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. 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. You can see the 1 risk we have identified for Dianguang Explosion-proof TechnologyLtd by visiting our risks dashboard for free on our platform here.

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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.