Shenzhen Sunlord ElectronicsLtd (SZSE:002138) has had a great run on the share market with its stock up by a significant 27% over the last three months. 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 Shenzhen Sunlord ElectronicsLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To Calculate Return On Equity?

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 Shenzhen Sunlord ElectronicsLtd is:

13% = CN¥895m ÷ CN¥6.8b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.13 in profit.

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. 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.

Shenzhen Sunlord ElectronicsLtd's Earnings Growth And 13% ROE

To start with, Shenzhen Sunlord ElectronicsLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.3%. This probably laid the ground for Shenzhen Sunlord ElectronicsLtd's moderate 6.1% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Shenzhen Sunlord ElectronicsLtd's growth is quite high when compared to the industry average growth of 3.9% 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. Has the market priced in the future outlook for 002138? You can find out in our latest intrinsic value infographic research report.

Is Shenzhen Sunlord ElectronicsLtd Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 32% (implying that the company retains 68% of its profits), it seems that Shenzhen Sunlord ElectronicsLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Shenzhen Sunlord ElectronicsLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 35%. As a result, Shenzhen Sunlord ElectronicsLtd's ROE is not expected to change by much either, which we inferred from the analyst estimate of 16% for future ROE.

Conclusion

On the whole, we feel that Shenzhen Sunlord ElectronicsLtd'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. 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.