With its stock down 10% over the past three months, it is easy to disregard Thunder Software TechnologyLtd (SZSE:300496). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Thunder Software TechnologyLtd'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Thunder Software TechnologyLtd is:

3.1% = CN¥307m ÷ CN¥9.9b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. 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.

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. 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 Thunder Software TechnologyLtd's Earnings Growth And 3.1% ROE

As you can see, Thunder Software TechnologyLtd's ROE looks pretty weak. Even compared to the average industry ROE of 4.1%, the company's ROE is quite dismal. In spite of this, Thunder Software TechnologyLtd was able to grow its net income considerably, at a rate of 22% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Thunder Software TechnologyLtd compares quite favourably to the industry average, which shows a decline of 2.8% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is 300496 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Thunder Software TechnologyLtd Making Efficient Use Of Its Profits?

Thunder Software TechnologyLtd's three-year median payout ratio to shareholders is 19%, which is quite low. This implies that the company is retaining 81% of its profits. So it looks like Thunder Software TechnologyLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Thunder Software TechnologyLtd has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its 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%. Still, forecasts suggest that Thunder Software TechnologyLtd's future ROE will rise to 9.4% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we feel that Thunder Software TechnologyLtd certainly does have some positive factors to consider. 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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.