With its stock down 26% over the past three months, it is easy to disregard Shanghai Laimu ElectronicsLtd (SHSE:603633). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Shanghai Laimu ElectronicsLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You 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 Shanghai Laimu ElectronicsLtd is:

4.0% = CN¥76m ÷ CN¥1.9b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Shanghai Laimu ElectronicsLtd's Earnings Growth And 4.0% ROE

It is hard to argue that Shanghai Laimu ElectronicsLtd's ROE is much good in and of itself. Even compared to the average industry ROE of 7.2%, the company's ROE is quite dismal. Although, we can see that Shanghai Laimu ElectronicsLtd saw a modest net income growth of 13% over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Shanghai Laimu ElectronicsLtd's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% 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). Doing so will help them establish if the stock's future looks promising or ominous. 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 Shanghai Laimu ElectronicsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Shanghai Laimu ElectronicsLtd Efficiently Re-investing Its Profits?

Shanghai Laimu ElectronicsLtd has a healthy combination of a moderate three-year median payout ratio of 38% (or a retention ratio of 62%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Shanghai Laimu ElectronicsLtd has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we do feel that Shanghai Laimu ElectronicsLtd has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. Our risks dashboard would have the 2 risks we have identified for Shanghai Laimu ElectronicsLtd.

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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.