Shanghai Flyco Electrical Appliance (SHSE:603868) has had a rough month with its share price down 14%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Shanghai Flyco Electrical Appliance's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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 Shanghai Flyco Electrical Appliance is:

22% = CN¥657m ÷ CN¥3.0b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.22 in profit.

What Is The Relationship Between ROE And 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. 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 Shanghai Flyco Electrical Appliance's Earnings Growth And 22% ROE

At first glance, Shanghai Flyco Electrical Appliance seems to have a decent ROE. Especially when compared to the industry average of 9.9% the company's ROE looks pretty impressive. This certainly adds some context to Shanghai Flyco Electrical Appliance's decent 6.4% net income growth seen over the past five years.

As a next step, we compared Shanghai Flyco Electrical Appliance's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 7.9% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Shanghai Flyco Electrical Appliance is trading on a high P/E or a low P/E, relative to its industry.

Is Shanghai Flyco Electrical Appliance Using Its Retained Earnings Effectively?

While Shanghai Flyco Electrical Appliance has a three-year median payout ratio of 96% (which means it retains 4.3% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Shanghai Flyco Electrical Appliance is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.

Conclusion

On the whole, we do feel that Shanghai Flyco Electrical Appliance has some positive attributes. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.