Ferrotec (An Hui) Technology DevelopmentLTD (SZSE:301297) has had a great run on the share market with its stock up by a significant 27% over the last three months. 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. Particularly, we will be paying attention to Ferrotec (An Hui) Technology DevelopmentLTD's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Ferrotec (An Hui) Technology DevelopmentLTD
How Do You Calculate Return On Equity?
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 Ferrotec (An Hui) Technology DevelopmentLTD is:
6.3% = CN¥89m ÷ CN¥1.4b (Based on the trailing twelve months to September 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.
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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Ferrotec (An Hui) Technology DevelopmentLTD's Earnings Growth And 6.3% ROE
When you first look at it, Ferrotec (An Hui) Technology DevelopmentLTD's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 6.1%, we may spare it some thought. On the other hand, Ferrotec (An Hui) Technology DevelopmentLTD reported a moderate 17% net income growth over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that Ferrotec (An Hui) Technology DevelopmentLTD's growth is quite high when compared to the industry average growth of 7.0% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Ferrotec (An Hui) Technology DevelopmentLTD's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Ferrotec (An Hui) Technology DevelopmentLTD Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 26% (implying that the company retains 74% of its profits), it seems that Ferrotec (An Hui) Technology DevelopmentLTD is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Summary
In total, it does look like Ferrotec (An Hui) Technology DevelopmentLTD has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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 Ferrotec (An Hui) Technology DevelopmentLTD 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.