With its stock down 21% over the past three months, it is easy to disregard Dirui IndustrialLtd (SZSE:300396). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Dirui IndustrialLtd'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 Dirui IndustrialLtd is:
15% = CN¥301m ÷ CN¥2.0b (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¥0.15 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. 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.
Dirui IndustrialLtd's Earnings Growth And 15% ROE
To begin with, Dirui IndustrialLtd seems to have a respectable ROE. Especially when compared to the industry average of 10.0% the company's ROE looks pretty impressive. This probably laid the ground for Dirui IndustrialLtd's moderate 5.7% net income growth seen over the past five years.
As a next step, we compared Dirui IndustrialLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same period.
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. Doing so will help them establish if the stock's future looks promising or ominous. Is Dirui IndustrialLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Dirui IndustrialLtd Making Efficient Use Of Its Profits?
Dirui IndustrialLtd has a healthy combination of a moderate three-year median payout ratio of 49% (or a retention ratio of 51%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Dirui IndustrialLtd has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 27% over the next three years. As a result, the expected drop in Dirui IndustrialLtd's payout ratio explains the anticipated rise in the company's future ROE to 19%, over the same period.
Summary
On the whole, we feel that Dirui IndustrialLtd's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.