Most readers would already be aware that Shenzhen Yinghe Technology's (SZSE:300457) stock increased significantly by 17% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Shenzhen Yinghe Technology'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Is ROE Calculated?

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 Shenzhen Yinghe Technology is:

17% = CN¥1.2b ÷ CN¥6.8b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.17 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Shenzhen Yinghe Technology's Earnings Growth And 17% ROE

To start with, Shenzhen Yinghe Technology's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.9%. This probably laid the ground for Shenzhen Yinghe Technology's significant 23% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Shenzhen Yinghe Technology's growth is quite high when compared to the industry average growth of 10% 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. 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. If you're wondering about Shenzhen Yinghe Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shenzhen Yinghe Technology Efficiently Re-investing Its Profits?

Shenzhen Yinghe Technology has a really low three-year median payout ratio of 22%, meaning that it has the remaining 78% left over to reinvest into its business. So it looks like Shenzhen Yinghe Technology is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Shenzhen Yinghe Technology has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 23%. As a result, Shenzhen Yinghe Technology's ROE is not expected to change by much either, which we inferred from the analyst estimate of 14% for future ROE.

Summary

In total, we are pretty happy with Shenzhen Yinghe Technology'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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.