Most readers would already be aware that ShenZhen YUTO Packaging Technology's (SZSE:002831) stock increased significantly by 12% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study ShenZhen YUTO Packaging Technology's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for ShenZhen YUTO Packaging Technology is:

14% = CN¥1.6b ÷ CN¥12b (Based on the trailing twelve months to September 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¥0.14.

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. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

ShenZhen YUTO Packaging Technology's Earnings Growth And 14% ROE

To start with, ShenZhen YUTO Packaging Technology's ROE looks acceptable. Especially when compared to the industry average of 5.4% the company's ROE looks pretty impressive. Probably as a result of this, ShenZhen YUTO Packaging Technology was able to see a decent growth of 9.3% over the last five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by ShenZhen YUTO Packaging Technology compares quite favourably to the industry average, which shows a decline of 0.005% over the last few years.

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. Is ShenZhen YUTO Packaging Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is ShenZhen YUTO Packaging Technology Efficiently Re-investing Its Profits?

ShenZhen YUTO Packaging Technology has a low three-year median payout ratio of 23%, meaning that the company retains the remaining 77% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, ShenZhen YUTO Packaging Technology is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 54% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

Overall, we are quite pleased with ShenZhen YUTO Packaging Technology's performance. 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.