Qinhuangdao Tianqin Equipment ManufacturingLtd (SZSE:300922) has had a great run on the share market with its stock up by a significant 23% over the last week. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study Qinhuangdao Tianqin Equipment ManufacturingLtd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How To Calculate Return On Equity?

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 Qinhuangdao Tianqin Equipment ManufacturingLtd is:

3.6% = CN¥32m ÷ CN¥882m (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 in profit.

Why Is ROE Important For 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.

Qinhuangdao Tianqin Equipment ManufacturingLtd's Earnings Growth And 3.6% ROE

As you can see, Qinhuangdao Tianqin Equipment ManufacturingLtd's ROE looks pretty weak. Even when compared to the industry average of 6.0%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 13% seen by Qinhuangdao Tianqin Equipment ManufacturingLtd was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Qinhuangdao Tianqin Equipment ManufacturingLtd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 14% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Qinhuangdao Tianqin Equipment ManufacturingLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Qinhuangdao Tianqin Equipment ManufacturingLtd Efficiently Re-investing Its Profits?

Qinhuangdao Tianqin Equipment ManufacturingLtd's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 56% (or a retention ratio of 44%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 3 risks we have identified for Qinhuangdao Tianqin Equipment ManufacturingLtd by visiting our risks dashboard for free on our platform here.

In addition, Qinhuangdao Tianqin Equipment ManufacturingLtd has been paying dividends over a period of three years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

On the whole, Qinhuangdao Tianqin Equipment ManufacturingLtd's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Qinhuangdao Tianqin Equipment ManufacturingLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.