Milkyway Chemical Supply Chain ServiceLtd's (SHSE:603713) stock is up by a considerable 50% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Milkyway Chemical Supply Chain ServiceLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Milkyway Chemical Supply Chain ServiceLtd is:

12% = CN¥544m ÷ CN¥4.5b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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.

Milkyway Chemical Supply Chain ServiceLtd's Earnings Growth And 12% ROE

To start with, Milkyway Chemical Supply Chain ServiceLtd's ROE looks acceptable. Especially when compared to the industry average of 7.9% the company's ROE looks pretty impressive. Probably as a result of this, Milkyway Chemical Supply Chain ServiceLtd was able to see an impressive net income growth of 24% over the last five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Milkyway Chemical Supply Chain ServiceLtd'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.

Earnings growth is an important metric to consider when valuing a stock. 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 Milkyway Chemical Supply Chain ServiceLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Milkyway Chemical Supply Chain ServiceLtd Efficiently Re-investing Its Profits?

Milkyway Chemical Supply Chain ServiceLtd has a really low three-year median payout ratio of 15%, meaning that it has the remaining 85% left over to reinvest into its business. So it looks like Milkyway Chemical Supply Chain ServiceLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Milkyway Chemical Supply Chain ServiceLtd has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 16%. Still, forecasts suggest that Milkyway Chemical Supply Chain ServiceLtd's future ROE will rise to 15% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we are quite pleased with Milkyway Chemical Supply Chain ServiceLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.