Most readers would already be aware that Ningbo Sunrise Elc TechnologyLtd's (SZSE:002937) stock increased significantly by 16% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Ningbo Sunrise Elc TechnologyLtd's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Ningbo Sunrise Elc TechnologyLtd is:

20% = CN¥298m ÷ CN¥1.5b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.20.

What Has ROE Got To Do With 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.

Ningbo Sunrise Elc TechnologyLtd's Earnings Growth And 20% ROE

To begin with, Ningbo Sunrise Elc TechnologyLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.5%. This probably laid the ground for Ningbo Sunrise Elc TechnologyLtd's significant 20% 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.

As a next step, we compared Ningbo Sunrise Elc TechnologyLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.0%.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 Ningbo Sunrise Elc TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Ningbo Sunrise Elc TechnologyLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Ningbo Sunrise Elc TechnologyLtd is 41%, which is moderately low. The company is retaining the remaining 59%. By the looks of it, the dividend is well covered and Ningbo Sunrise Elc TechnologyLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Ningbo Sunrise Elc TechnologyLtd has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we feel that Ningbo Sunrise Elc TechnologyLtd's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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.