It is hard to get excited after looking at AIMA Technology Group's (SHSE:603529) recent performance, when its stock has declined 15% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study AIMA Technology Group's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for AIMA Technology Group is:

23% = CN¥2.0b ÷ CN¥8.4b (Based on the trailing twelve months to June 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¥0.23 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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

AIMA Technology Group's Earnings Growth And 23% ROE

Firstly, we acknowledge that AIMA Technology Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 5.6% also doesn't go unnoticed by us. So, the substantial 35% net income growth seen by AIMA Technology Group over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that AIMA Technology Group's growth is quite high when compared to the industry average growth of 15% 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. If you're wondering about AIMA Technology Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is AIMA Technology Group Making Efficient Use Of Its Profits?

AIMA Technology Group's three-year median payout ratio is a pretty moderate 38%, meaning the company retains 62% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like AIMA Technology Group is reinvesting its earnings efficiently.

Along with seeing a growth in earnings, AIMA Technology Group only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. Accordingly, forecasts suggest that AIMA Technology Group's future ROE will be 23% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that AIMA Technology Group's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.