It is hard to get excited after looking at Imeik Technology DevelopmentLtd's (SZSE:300896) recent performance, when its stock has declined 23% over the past three months. 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 Imeik Technology DevelopmentLtd's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Is ROE Calculated?

Return on equity 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 Imeik Technology DevelopmentLtd is:

28% = CN¥2.0b ÷ CN¥7.0b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.28 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Imeik Technology DevelopmentLtd's Earnings Growth And 28% ROE

First thing first, we like that Imeik Technology DevelopmentLtd has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 5.8% which is quite remarkable. So, the substantial 39% net income growth seen by Imeik Technology DevelopmentLtd over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Imeik Technology DevelopmentLtd's growth is quite high when compared to the industry average growth of 5.4% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 300896? You can find out in our latest intrinsic value infographic research report.

Is Imeik Technology DevelopmentLtd Efficiently Re-investing Its Profits?

Imeik Technology DevelopmentLtd's three-year median payout ratio is a pretty moderate 48%, meaning the company retains 52% of its income. By the looks of it, the dividend is well covered and Imeik Technology DevelopmentLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Imeik Technology DevelopmentLtd has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 39%. Accordingly, forecasts suggest that Imeik Technology DevelopmentLtd's future ROE will be 31% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Imeik Technology DevelopmentLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.