Shenzhen Envicool Technology (SZSE:002837) has had a great run on the share market with its stock up by a significant 67% over the last three months. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Shenzhen Envicool Technology'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?

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 Shenzhen Envicool Technology is:

17% = CN¥486m ÷ CN¥2.8b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.17.

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.

A Side By Side comparison of Shenzhen Envicool Technology's Earnings Growth And 17% ROE

To start with, Shenzhen Envicool Technology's ROE looks acceptable. Especially when compared to the industry average of 6.3% the company's ROE looks pretty impressive. Probably as a result of this, Shenzhen Envicool Technology was able to see an impressive net income growth of 24% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Shenzhen Envicool Technology's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.4% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Shenzhen Envicool Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Shenzhen Envicool Technology Using Its Retained Earnings Effectively?

Shenzhen Envicool Technology has a three-year median payout ratio of 28% (where it is retaining 72% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Shenzhen Envicool Technology is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Shenzhen Envicool Technology has been paying dividends over a period of eight years. 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 31%. However, Shenzhen Envicool Technology's ROE is predicted to rise to 24% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with Shenzhen Envicool Technology's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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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.