Leedarson IoT Technology's (SHSE:605365) stock is up by a considerable 5.9% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Leedarson IoT Technology's ROE.

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.

How To 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 Leedarson IoT Technology is:

7.9% = CN¥270m ÷ CN¥3.4b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

What Is The Relationship Between ROE And Earnings Growth?

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

A Side By Side comparison of Leedarson IoT Technology's Earnings Growth And 7.9% ROE

At first glance, Leedarson IoT Technology's ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.2%, so we won't completely dismiss the company. Having said that, Leedarson IoT Technology's net income growth over the past five years is more or less flat. Bear in mind, the company's ROE is not very high. So that could also be one of the reasons behind the company's flat growth in earnings.

As a next step, we compared Leedarson IoT Technology'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 14% in the same 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. 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 Leedarson IoT Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Leedarson IoT Technology Efficiently Re-investing Its Profits?

Leedarson IoT Technology has a low three-year median payout ratio of 25% (or a retention ratio of 75%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Only recently, Leedarson IoT Technology started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we feel that the performance shown by Leedarson IoT Technology can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.