Kunshan Dongwei TechnologyLtd (SHSE:688700) has had a great run on the share market with its stock up by a significant 23% over the last month. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. Specifically, we decided to study Kunshan Dongwei TechnologyLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Kunshan Dongwei TechnologyLtd

How To 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 Kunshan Dongwei TechnologyLtd is:

21% = CN¥174m ÷ CN¥808m (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.21 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Kunshan Dongwei TechnologyLtd's Earnings Growth And 21% ROE

To begin with, Kunshan Dongwei TechnologyLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.2%. Probably as a result of this, Kunshan Dongwei TechnologyLtd was able to see an impressive net income growth of 28% over the last five years. We reckon that there could also 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 Kunshan Dongwei TechnologyLtd's growth is quite high when compared to the industry average growth of 14% 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. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Kunshan Dongwei TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kunshan Dongwei TechnologyLtd Efficiently Re-investing Its Profits?

Kunshan Dongwei TechnologyLtd's three-year median payout ratio to shareholders is 24%, which is quite low. This implies that the company is retaining 76% of its profits. So it looks like Kunshan Dongwei TechnologyLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Summary

On the whole, we feel that Kunshan Dongwei TechnologyLtd's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.