Most readers would already be aware that China National Electric Apparatus Research Institute's (SHSE:688128) stock increased significantly by 12% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to China National Electric Apparatus Research Institute's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for China National Electric Apparatus Research Institute

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for China National Electric Apparatus Research Institute is:

14% = CN¥357m ÷ CN¥2.5b (Based on the trailing twelve months to December 2022).

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¥0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

China National Electric Apparatus Research Institute's Earnings Growth And 14% ROE

At first glance, China National Electric Apparatus Research Institute seems to have a decent ROE. Especially when compared to the industry average of 8.8% the company's ROE looks pretty impressive. This certainly adds some context to China National Electric Apparatus Research Institute's decent 15% net income growth seen over the past five years.

Next, on comparing China National Electric Apparatus Research Institute's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% in the same 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 688128 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is China National Electric Apparatus Research Institute Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 43% (implying that the company retains 57% of its profits), it seems that China National Electric Apparatus Research Institute is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, China National Electric Apparatus Research Institute has been paying dividends over a period of three 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 42%. Regardless, the future ROE for China National Electric Apparatus Research Institute is predicted to rise to 18% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that China National Electric Apparatus Research Institute's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.