Most readers would already be aware that Foshan Golden Milky Way Intelligent Equipment's (SZSE:300619) stock increased significantly by 23% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Foshan Golden Milky Way Intelligent Equipment's ROE today.

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 To Calculate Return On Equity?

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 Foshan Golden Milky Way Intelligent Equipment is:

2.6% = CN¥45m ÷ CN¥1.7b (Based on the trailing twelve months to March 2024).

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¥0.03 in profit.

What Has ROE Got To Do With 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.

Foshan Golden Milky Way Intelligent Equipment's Earnings Growth And 2.6% ROE

As you can see, Foshan Golden Milky Way Intelligent Equipment's ROE looks pretty weak. Not just that, even compared to the industry average of 6.9%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Foshan Golden Milky Way Intelligent Equipment grew its net income at a significant rate of 30% in the last five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Foshan Golden Milky Way Intelligent Equipment's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Foshan Golden Milky Way Intelligent Equipment fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Foshan Golden Milky Way Intelligent Equipment Making Efficient Use Of Its Profits?

Foshan Golden Milky Way Intelligent Equipment's three-year median payout ratio to shareholders is 7.5%, which is quite low. This implies that the company is retaining 92% of its profits. So it looks like Foshan Golden Milky Way Intelligent Equipment is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Foshan Golden Milky Way Intelligent Equipment has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we do feel that Foshan Golden Milky Way Intelligent Equipment has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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. You can see the 4 risks we have identified for Foshan Golden Milky Way Intelligent Equipment by visiting our risks dashboard for free on our platform here.

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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.