Hengerda New Materials (Fujian)'s (SZSE:300946) stock is up by a considerable 25% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Hengerda New Materials (Fujian)'s ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You 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 Hengerda New Materials (Fujian) is:

8.0% = CN¥94m ÷ CN¥1.2b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. 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?

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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Hengerda New Materials (Fujian)'s Earnings Growth And 8.0% ROE

At first glance, Hengerda New Materials (Fujian)'s ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 6.3%, is definitely interesting. Having said that, Hengerda New Materials (Fujian)'s net income growth over the past five years is more or less flat. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the low to flat growth in earnings could also be the result of this.

As a next step, we compared Hengerda New Materials (Fujian)'s net income growth with the industry and discovered that the industry saw an average growth of 7.4% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Hengerda New Materials (Fujian) is trading on a high P/E or a low P/E, relative to its industry.

Is Hengerda New Materials (Fujian) Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 29% (implying that the company keeps 71% of its income) over the last three years, Hengerda New Materials (Fujian) has seen a negligible amount of growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Hengerda New Materials (Fujian) has been paying dividends over a period of four years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

In total, it does look like Hengerda New Materials (Fujian) has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Up till now, we've only made a short study of the company's growth data. To gain further insights into Hengerda New Materials (Fujian)'s past profit growth, check out this visualization 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.