Zhejiang Yonggui Electric Equipment (SZSE:300351) has had a rough three months with its share price down 22%. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Zhejiang Yonggui Electric Equipment's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Zhejiang Yonggui Electric Equipment is:

4.3% = CN¥105m ÷ CN¥2.4b (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¥0.04 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. 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. 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.

Zhejiang Yonggui Electric Equipment's Earnings Growth And 4.3% ROE

It is hard to argue that Zhejiang Yonggui Electric Equipment's ROE is much good in and of itself. Even compared to the average industry ROE of 6.9%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Zhejiang Yonggui Electric Equipment grew its net income at a significant rate of 64% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. 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.

We then compared Zhejiang Yonggui Electric Equipment's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Zhejiang Yonggui Electric Equipment fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Yonggui Electric Equipment Making Efficient Use Of Its Profits?

Zhejiang Yonggui Electric Equipment's three-year median payout ratio is a pretty moderate 38%, meaning the company retains 62% of its income. By the looks of it, the dividend is well covered and Zhejiang Yonggui Electric Equipment is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Zhejiang Yonggui Electric Equipment 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.

Summary

Overall, we feel that Zhejiang Yonggui Electric Equipment certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.