Shijiazhuang Tonhe Electronics TechnologiesLtd's (SZSE:300491) stock is up by a considerable 24% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Shijiazhuang Tonhe Electronics TechnologiesLtd'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 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 Shijiazhuang Tonhe Electronics TechnologiesLtd is:

7.6% = CN¥87m ÷ CN¥1.1b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

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 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.

Shijiazhuang Tonhe Electronics TechnologiesLtd's Earnings Growth And 7.6% ROE

On the face of it, Shijiazhuang Tonhe Electronics TechnologiesLtd's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.9%. Moreover, we are quite pleased to see that Shijiazhuang Tonhe Electronics TechnologiesLtd's net income grew significantly at a rate of 39% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

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

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Shijiazhuang Tonhe Electronics TechnologiesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shijiazhuang Tonhe Electronics TechnologiesLtd Efficiently Re-investing Its Profits?

Shijiazhuang Tonhe Electronics TechnologiesLtd has a really low three-year median payout ratio of 14%, meaning that it has the remaining 86% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, Shijiazhuang Tonhe Electronics TechnologiesLtd has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we feel that Shijiazhuang Tonhe Electronics TechnologiesLtd certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.