Hengdian Group DMEGC Magnetics Ltd (SZSE:002056) has had a great run on the share market with its stock up by a significant 15% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Hengdian Group DMEGC Magnetics Ltd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Hengdian Group DMEGC Magnetics Ltd is:

14% = CN¥1.2b ÷ CN¥9.1b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Hengdian Group DMEGC Magnetics Ltd's Earnings Growth And 14% ROE

To begin with, Hengdian Group DMEGC Magnetics Ltd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.4%. This certainly adds some context to Hengdian Group DMEGC Magnetics Ltd's exceptional 21% net income growth seen over the past five years. We believe that there might also be 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 Hengdian Group DMEGC Magnetics Ltd's growth is quite high when compared to the industry average growth of 4.7% 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. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Hengdian Group DMEGC Magnetics Ltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hengdian Group DMEGC Magnetics Ltd Making Efficient Use Of Its Profits?

Hengdian Group DMEGC Magnetics Ltd has a three-year median payout ratio of 31% (where it is retaining 69% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Hengdian Group DMEGC Magnetics Ltd is reinvesting its earnings efficiently.

Additionally, Hengdian Group DMEGC Magnetics Ltd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. Regardless, the future ROE for Hengdian Group DMEGC Magnetics Ltd is predicted to rise to 18% despite there being not much change expected in its payout ratio.

Conclusion

In total, we are pretty happy with Hengdian Group DMEGC Magnetics Ltd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.