Universal Scientific Industrial (Shanghai)'s (SHSE:601231) stock is up by a considerable 7.0% over the past month. 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. Particularly, we will be paying attention to Universal Scientific Industrial (Shanghai)'s ROE today.
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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 Universal Scientific Industrial (Shanghai) is:
12% = CN¥1.9b ÷ CN¥16b (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 in profit.
What Is The Relationship Between ROE And 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 Universal Scientific Industrial (Shanghai)'s Earnings Growth And 12% ROE
To begin with, Universal Scientific Industrial (Shanghai) seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.7%. This probably laid the ground for Universal Scientific Industrial (Shanghai)'s moderate 18% net income growth seen over the past five years.
We then compared Universal Scientific Industrial (Shanghai)'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 11% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Universal Scientific Industrial (Shanghai)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Universal Scientific Industrial (Shanghai) Efficiently Re-investing Its Profits?
Universal Scientific Industrial (Shanghai) has a healthy combination of a moderate three-year median payout ratio of 33% (or a retention ratio of 67%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Moreover, Universal Scientific Industrial (Shanghai) is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 37% of its profits over the next three years. Regardless, the future ROE for Universal Scientific Industrial (Shanghai) is predicted to rise to 16% despite there being not much change expected in its payout ratio.
Conclusion
Overall, we are quite pleased with Universal Scientific Industrial (Shanghai)'s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.
