Most readers would already be aware that Eaglerise Electric & Electronic (China)'s (SZSE:002922) stock increased significantly by 42% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Eaglerise Electric & Electronic (China)'s ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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 Eaglerise Electric & Electronic (China) is:

8.4% = CN¥259m ÷ CN¥3.1b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax 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 Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Eaglerise Electric & Electronic (China)'s Earnings Growth And 8.4% ROE

When you first look at it, Eaglerise Electric & Electronic (China)'s ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 7.0% which we definitely can't overlook. Particularly, the substantial 31% net income growth seen by Eaglerise Electric & Electronic (China) over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Eaglerise Electric & Electronic (China)'s growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Eaglerise Electric & Electronic (China) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Eaglerise Electric & Electronic (China) Making Efficient Use Of Its Profits?

The three-year median payout ratio for Eaglerise Electric & Electronic (China) is 39%, which is moderately low. The company is retaining the remaining 61%. By the looks of it, the dividend is well covered and Eaglerise Electric & Electronic (China) is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Eaglerise Electric & Electronic (China) is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Summary

In total, we are pretty happy with Eaglerise Electric & Electronic (China)'s performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.