Chongqing Mas Sci.&Tech.Co.Ltd (SZSE:300275) has had a rough week with its share price down 12%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Chongqing Mas Sci.&Tech.Co.Ltd's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Chongqing Mas Sci.&Tech.Co.Ltd

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 Chongqing Mas Sci.&Tech.Co.Ltd is:

4.8% = CN¥38m ÷ CN¥790m (Based on the trailing twelve months to March 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 in profit.

What Is The Relationship Between ROE And 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. 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.

Chongqing Mas Sci.&Tech.Co.Ltd's Earnings Growth And 4.8% ROE

It is quite clear that Chongqing Mas Sci.&Tech.Co.Ltd's ROE is rather low. Even when compared to the industry average of 7.6%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Chongqing Mas Sci.&Tech.Co.Ltd grew its net income at a significant rate of 39% in the last five years. Therefore, there could be other reasons behind this growth. 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.

As a next step, we compared Chongqing Mas Sci.&Tech.Co.Ltd'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. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Chongqing Mas Sci.&Tech.Co.Ltd is trading on a high P/E or a low P/E, relative to its industry.

Is Chongqing Mas Sci.&Tech.Co.Ltd Efficiently Re-investing Its Profits?

Chongqing Mas Sci.&Tech.Co.Ltd's three-year median payout ratio to shareholders is 15%, which is quite low. This implies that the company is retaining 85% of its profits. So it looks like Chongqing Mas Sci.&Tech.Co.Ltd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Chongqing Mas Sci.&Tech.Co.Ltd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we do feel that Chongqing Mas Sci.&Tech.Co.Ltd has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Chongqing Mas Sci.&Tech.Co.Ltd visit our risks dashboard for free.

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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.