Sungrow Power Supply's (SZSE:300274) stock up by 9.6% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Sungrow Power Supply'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Do You Calculate Return On Equity?

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 Sungrow Power Supply is:

33% = CN¥8.9b ÷ CN¥27b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.33 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Sungrow Power Supply's Earnings Growth And 33% ROE

To begin with, Sungrow Power Supply has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 7.2% also doesn't go unnoticed by us. Under the circumstances, Sungrow Power Supply's considerable five year net income growth of 46% was to be expected.

Next, on comparing with the industry net income growth, we found that Sungrow Power Supply's growth is quite high when compared to the industry average growth of 14% 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. Is 300274 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Sungrow Power Supply Efficiently Re-investing Its Profits?

Sungrow Power Supply's ' three-year median payout ratio is on the lower side at 9.1% implying that it is retaining a higher percentage (91%) of its profits. So it looks like Sungrow Power Supply is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Sungrow Power Supply has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 9.7% of its profits over the next three years. However, Sungrow Power Supply's future ROE is expected to decline to 25% despite there being not much change anticipated in the company's payout ratio.

Conclusion

On the whole, we feel that Sungrow Power Supply'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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.