Most readers would already be aware that Shandong Swan CottonIndustrial Machinery StockLtd's (SHSE:603029) stock increased significantly by 17% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Shandong Swan CottonIndustrial Machinery StockLtd's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Shandong Swan CottonIndustrial Machinery StockLtd

How Is ROE Calculated?

ROE 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 Shandong Swan CottonIndustrial Machinery StockLtd is:

7.5% = CN¥60m ÷ CN¥805m (Based on the trailing twelve months to March 2023).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 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. 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.

Shandong Swan CottonIndustrial Machinery StockLtd's Earnings Growth And 7.5% ROE

At first glance, Shandong Swan CottonIndustrial Machinery StockLtd's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.4%. Looking at Shandong Swan CottonIndustrial Machinery StockLtd's exceptional 40% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Shandong Swan CottonIndustrial Machinery StockLtd'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 11%.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Shandong Swan CottonIndustrial Machinery StockLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shandong Swan CottonIndustrial Machinery StockLtd Efficiently Re-investing Its Profits?

Shandong Swan CottonIndustrial Machinery StockLtd has a three-year median payout ratio of 30% (where it is retaining 70% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Shandong Swan CottonIndustrial Machinery StockLtd is reinvesting its earnings efficiently.

Moreover, Shandong Swan CottonIndustrial Machinery StockLtd is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Summary

Overall, we feel that Shandong Swan CottonIndustrial Machinery StockLtd 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.

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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.