It is hard to get excited after looking at Milkyway Chemical Supply Chain ServiceLtd's (SHSE:603713) recent performance, when its stock has declined 32% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Milkyway Chemical Supply Chain ServiceLtd's ROE.

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.

View our latest analysis for Milkyway Chemical Supply Chain ServiceLtd

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 Milkyway Chemical Supply Chain ServiceLtd is:

13% = CN¥564m ÷ CN¥4.4b (Based on the trailing twelve months to September 2023).

The 'return' is the profit 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¥0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Milkyway Chemical Supply Chain ServiceLtd's Earnings Growth And 13% ROE

At first glance, Milkyway Chemical Supply Chain ServiceLtd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.4%. Probably as a result of this, Milkyway Chemical Supply Chain ServiceLtd was able to see an impressive net income growth of 31% over the last five years. We reckon that there could also be other factors at play here. 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 Milkyway Chemical Supply Chain ServiceLtd'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 14%.

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. If you're wondering about Milkyway Chemical Supply Chain ServiceLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Milkyway Chemical Supply Chain ServiceLtd Efficiently Re-investing Its Profits?

Milkyway Chemical Supply Chain ServiceLtd's three-year median payout ratio to shareholders is 13%, which is quite low. This implies that the company is retaining 87% of its profits. So it looks like Milkyway Chemical Supply Chain ServiceLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Milkyway Chemical Supply Chain ServiceLtd has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 16% over the next three years. Regardless, the future ROE for Milkyway Chemical Supply Chain ServiceLtd is speculated to rise to 16% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

Overall, we are quite pleased with Milkyway Chemical Supply Chain ServiceLtd'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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.