Most readers would already be aware that Suzhou Recodeal Interconnect SystemLtd's (SHSE:688800) stock increased significantly by 21% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Suzhou Recodeal Interconnect SystemLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Do You 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 Suzhou Recodeal Interconnect SystemLtd is:

6.8% = CN¥137m ÷ CN¥2.0b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Suzhou Recodeal Interconnect SystemLtd's Earnings Growth And 6.8% ROE

When you first look at it, Suzhou Recodeal Interconnect SystemLtd's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 6.9%, we may spare it some thought. Moreover, we are quite pleased to see that Suzhou Recodeal Interconnect SystemLtd's net income grew significantly at a rate of 28% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Suzhou Recodeal Interconnect SystemLtd's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Suzhou Recodeal Interconnect SystemLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Suzhou Recodeal Interconnect SystemLtd Using Its Retained Earnings Effectively?

Suzhou Recodeal Interconnect SystemLtd's ' three-year median payout ratio is on the lower side at 21% implying that it is retaining a higher percentage (79%) of its profits. So it looks like Suzhou Recodeal Interconnect SystemLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

While Suzhou Recodeal Interconnect SystemLtd has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 6.7% over the next three years. The fact that the company's ROE is expected to rise to 12% over the same period is explained by the drop in the payout ratio.

Conclusion

In total, it does look like Suzhou Recodeal Interconnect SystemLtd has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.