ShenZhen Woer Heat-Shrinkable MaterialLtd (SZSE:002130) has had a rough month with its share price down 16%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to ShenZhen Woer Heat-Shrinkable MaterialLtd'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for ShenZhen Woer Heat-Shrinkable MaterialLtd is:

16% = CN¥890m ÷ CN¥5.7b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.16.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of ShenZhen Woer Heat-Shrinkable MaterialLtd's Earnings Growth And 16% ROE

To begin with, ShenZhen Woer Heat-Shrinkable MaterialLtd seems to have a respectable ROE. On comparing with the average industry ROE of 6.7% the company's ROE looks pretty remarkable. This certainly adds some context to ShenZhen Woer Heat-Shrinkable MaterialLtd's exceptional 28% net income growth seen over the past five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that ShenZhen Woer Heat-Shrinkable MaterialLtd's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if ShenZhen Woer Heat-Shrinkable MaterialLtd is trading on a high P/E or a low P/E, relative to its industry.

Is ShenZhen Woer Heat-Shrinkable MaterialLtd Making Efficient Use Of Its Profits?

ShenZhen Woer Heat-Shrinkable MaterialLtd's three-year median payout ratio to shareholders is 8.2%, which is quite low. This implies that the company is retaining 92% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, ShenZhen Woer Heat-Shrinkable MaterialLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we feel that ShenZhen Woer Heat-Shrinkable MaterialLtd's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.