Shanghai Hajime Advanced Material Technology (SZSE:301000) has had a great run on the share market with its stock up by a significant 29% over the last 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 Shanghai Hajime Advanced Material Technology'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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 Shanghai Hajime Advanced Material Technology is:

11% = CN¥131m ÷ CN¥1.1b (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¥0.11 in profit.

Why Is ROE Important For Earnings Growth?

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

Shanghai Hajime Advanced Material Technology's Earnings Growth And 11% ROE

To start with, Shanghai Hajime Advanced Material Technology's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.4%. Despite this, Shanghai Hajime Advanced Material Technology's five year net income growth was quite low averaging at only 2.5%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that Shanghai Hajime Advanced Material Technology's reported growth was lower than the industry growth of 6.3% over the last few years, which is not something we like 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. If you're wondering about Shanghai Hajime Advanced Material Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shanghai Hajime Advanced Material Technology Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 75% (or a retention ratio of 25%), most of Shanghai Hajime Advanced Material Technology's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Shanghai Hajime Advanced Material Technology has been paying dividends over a period of three 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

On the whole, we do feel that Shanghai Hajime Advanced Material Technology has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.