Leon Technology (SZSE:300603) has had a rough week with its share price down 15%. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Leon Technology's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. 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?

Return on equity 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 Leon Technology is:

0.7% = CN¥11m ÷ CN¥1.5b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.01 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Leon Technology's Earnings Growth And 0.7% ROE

As you can see, Leon Technology's ROE looks pretty weak. Even compared to the average industry ROE of 4.6%, the company's ROE is quite dismal. Thus, the low net income growth of 2.8% seen by Leon Technology over the past five years could probably be the result of it having a lower ROE.

We then performed a comparison between Leon Technology's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 2.5% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Leon Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Leon Technology Efficiently Re-investing Its Profits?

Leon Technology doesn't pay any regular dividends, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain the low earnings growth the company has seen. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

In total, it does look like Leon Technology has some positive aspects to its business. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Leon Technology visit our risks dashboard for free.

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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.