Harbin Electric Corporation Jiamusi Electric MachineLtd (SZSE:000922) has had a rough three months with its share price down 33%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Harbin Electric Corporation Jiamusi Electric MachineLtd's ROE today.

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

How To Calculate Return On Equity?

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 Harbin Electric Corporation Jiamusi Electric MachineLtd is:

12% = CN¥417m ÷ CN¥3.6b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.12 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.

Harbin Electric Corporation Jiamusi Electric MachineLtd's Earnings Growth And 12% ROE

To begin with, Harbin Electric Corporation Jiamusi Electric MachineLtd seems to have a respectable ROE. On comparing with the average industry ROE of 6.7% the company's ROE looks pretty remarkable. Yet, Harbin Electric Corporation Jiamusi Electric MachineLtd has posted measly growth of 3.2% over the past five years. That's a bit unexpected from a company which has such a high rate of return. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Harbin Electric Corporation Jiamusi Electric MachineLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 11% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Harbin Electric Corporation Jiamusi Electric MachineLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Harbin Electric Corporation Jiamusi Electric MachineLtd Efficiently Re-investing Its Profits?

Harbin Electric Corporation Jiamusi Electric MachineLtd has a low three-year median payout ratio of 22% (meaning, the company keeps the remaining 78% of profits) which means that the company is retaining more of its earnings. However, the low earnings growth number doesn't reflect this fact. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Harbin Electric Corporation Jiamusi Electric MachineLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, it does look like Harbin Electric Corporation Jiamusi Electric MachineLtd has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.