It is hard to get excited after looking at Neway CNC Equipment (Suzhou)'s (SHSE:688697) recent performance, when its stock has declined 18% over the past month. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Neway CNC Equipment (Suzhou)'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Neway CNC Equipment (Suzhou)

How Is ROE Calculated?

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 Neway CNC Equipment (Suzhou) is:

17% = CN¥216m ÷ CN¥1.3b (Based on the trailing twelve months to June 2022).

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¥0.17 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Neway CNC Equipment (Suzhou)'s Earnings Growth And 17% ROE

To start with, Neway CNC Equipment (Suzhou)'s ROE looks acceptable. Especially when compared to the industry average of 8.0% the company's ROE looks pretty impressive. This certainly adds some context to Neway CNC Equipment (Suzhou)'s exceptional 33% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Neway CNC Equipment (Suzhou)'s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 12%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Neway CNC Equipment (Suzhou) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Neway CNC Equipment (Suzhou) Efficiently Re-investing Its Profits?

The three-year median payout ratio for Neway CNC Equipment (Suzhou) is 35%, which is moderately low. The company is retaining the remaining 65%. By the looks of it, the dividend is well covered and Neway CNC Equipment (Suzhou) is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Along with seeing a growth in earnings, Neway CNC Equipment (Suzhou) only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

Overall, we are quite pleased with Neway CNC Equipment (Suzhou)'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 1 risk we have identified for Neway CNC Equipment (Suzhou) by visiting our risks dashboard for free on our platform here.

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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.