SolaX Power Network Technology (Zhejiang) (SHSE:688717) has had a rough three months with its share price down 15%. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study SolaX Power Network Technology (Zhejiang)'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 SolaX Power Network Technology (Zhejiang) is:

70% = CN¥1.6b ÷ CN¥2.3b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.70 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.

SolaX Power Network Technology (Zhejiang)'s Earnings Growth And 70% ROE

First thing first, we like that SolaX Power Network Technology (Zhejiang) has an impressive ROE. Secondly, even when compared to the industry average of 7.2% the company's ROE is quite impressive. Under the circumstances, SolaX Power Network Technology (Zhejiang)'s considerable five year net income growth of 79% was to be expected.

We then compared SolaX Power Network Technology (Zhejiang)'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 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about SolaX Power Network Technology (Zhejiang)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is SolaX Power Network Technology (Zhejiang) Using Its Retained Earnings Effectively?

Given that SolaX Power Network Technology (Zhejiang) doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

In total, we are pretty happy with SolaX Power Network Technology (Zhejiang)'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 2 risks we have identified for SolaX Power Network Technology (Zhejiang).

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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.