It is hard to get excited after looking at Suzhou Hengmingda Electronic Technology's (SZSE:002947) recent performance, when its stock has declined 7.1% over the past month. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Suzhou Hengmingda Electronic Technology's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Suzhou Hengmingda Electronic Technology is:

15% = CN¥311m ÷ CN¥2.1b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.15 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. 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. 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.

Suzhou Hengmingda Electronic Technology's Earnings Growth And 15% ROE

To start with, Suzhou Hengmingda Electronic Technology's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.3%. This certainly adds some context to Suzhou Hengmingda Electronic Technology's decent 15% net income growth seen over the past five years.

As a next step, we compared Suzhou Hengmingda Electronic Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.4%.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Suzhou Hengmingda Electronic Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Suzhou Hengmingda Electronic Technology Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 39% (implying that the company retains 61% of its profits), it seems that Suzhou Hengmingda Electronic Technology is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Suzhou Hengmingda Electronic Technology has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Suzhou Hengmingda Electronic Technology'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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 1 risk we have identified for Suzhou Hengmingda Electronic Technology 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com