Ningbo Yongxin OpticsLtd (SHSE:603297) has had a rough month with its share price down 8.1%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Ningbo Yongxin OpticsLtd's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How To 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 Ningbo Yongxin OpticsLtd is:

13% = CN¥233m ÷ CN¥1.9b (Based on the trailing twelve months to March 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¥0.13.

What Has ROE Got To Do With 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 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.

Ningbo Yongxin OpticsLtd's Earnings Growth And 13% ROE

At first glance, Ningbo Yongxin OpticsLtd seems to have a decent ROE. On comparing with the average industry ROE of 6.3% the company's ROE looks pretty remarkable. This probably laid the ground for Ningbo Yongxin OpticsLtd's moderate 15% net income growth seen over the past five years.

As a next step, we compared Ningbo Yongxin OpticsLtd'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 7.1%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Ningbo Yongxin OpticsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Ningbo Yongxin OpticsLtd Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 39% (implying that the company retains 61% of its profits), it seems that Ningbo Yongxin OpticsLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Ningbo Yongxin OpticsLtd has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Ningbo Yongxin OpticsLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.