Most readers would already be aware that Anhui Transport Consulting & Design InstituteLtd's (SHSE:603357) stock increased significantly by 18% over the past three months. 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. Specifically, we decided to study Anhui Transport Consulting & Design InstituteLtd's ROE in this article.

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 return on equity is:

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

So, based on the above formula, the ROE for Anhui Transport Consulting & Design InstituteLtd is:

13% = CN¥484m ÷ CN¥3.6b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.13 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Anhui Transport Consulting & Design InstituteLtd's Earnings Growth And 13% ROE

To begin with, Anhui Transport Consulting & Design InstituteLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.2%. This certainly adds some context to Anhui Transport Consulting & Design InstituteLtd's decent 6.6% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Anhui Transport Consulting & Design InstituteLtd's growth is quite high when compared to the industry average growth of 0.3% in the same period, which is great to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Anhui Transport Consulting & Design InstituteLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Anhui Transport Consulting & Design InstituteLtd Making Efficient Use Of Its Profits?

While Anhui Transport Consulting & Design InstituteLtd has a three-year median payout ratio of 51% (which means it retains 49% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Anhui Transport Consulting & Design InstituteLtd has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Anhui Transport Consulting & Design InstituteLtd's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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.