Kunshan Dongwei TechnologyLtd (SHSE:688700) has had a great run on the share market with its stock up by a significant 86% 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 Kunshan Dongwei TechnologyLtd's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Kunshan Dongwei TechnologyLtd

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 Kunshan Dongwei TechnologyLtd is:

23% = CN¥185m ÷ CN¥818m (Based on the trailing twelve months to June 2022).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.23 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Kunshan Dongwei TechnologyLtd's Earnings Growth And 23% ROE

At first glance, Kunshan Dongwei TechnologyLtd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.0%. Probably as a result of this, Kunshan Dongwei TechnologyLtd was able to see an impressive net income growth of 28% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Kunshan Dongwei TechnologyLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 12%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Kunshan Dongwei TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kunshan Dongwei TechnologyLtd Making Efficient Use Of Its Profits?

Kunshan Dongwei TechnologyLtd has a really low three-year median payout ratio of 24%, meaning that it has the remaining 76% left over to reinvest into its business. So it looks like Kunshan Dongwei TechnologyLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Along with seeing a growth in earnings, Kunshan Dongwei TechnologyLtd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 28%. Regardless, the future ROE for Kunshan Dongwei TechnologyLtd is predicted to rise to 39% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we are quite pleased with Kunshan Dongwei TechnologyLtd'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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.