Shaanxi Huaqin Technology IndustryLtd (SHSE:688281) has had a rough month with its share price down 21%. 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. Particularly, we will be paying attention to Shaanxi Huaqin Technology IndustryLtd'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Shaanxi Huaqin Technology IndustryLtd

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 Shaanxi Huaqin Technology IndustryLtd is:

9.5% = CN¥398m ÷ CN¥4.2b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.09 in profit.

What Has ROE Got To Do With 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 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 Shaanxi Huaqin Technology IndustryLtd's Earnings Growth And 9.5% ROE

On the face of it, Shaanxi Huaqin Technology IndustryLtd's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.8%, is definitely interesting. Especially when you consider Shaanxi Huaqin Technology IndustryLtd's exceptional 40% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence, there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

We then compared Shaanxi Huaqin Technology IndustryLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same 5-year period.

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. If you're wondering about Shaanxi Huaqin Technology IndustryLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shaanxi Huaqin Technology IndustryLtd Making Efficient Use Of Its Profits?

Shaanxi Huaqin Technology IndustryLtd's ' three-year median payout ratio is on the lower side at 7.9% implying that it is retaining a higher percentage (92%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Along with seeing a growth in earnings, Shaanxi Huaqin Technology IndustryLtd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 7.9% of its profits over the next three years. Still, forecasts suggest that Shaanxi Huaqin Technology IndustryLtd's future ROE will rise to 15% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we are pretty happy with Shaanxi Huaqin Technology IndustryLtd's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.