Do Its Financials Have Any Role To Play In Driving Shandong Golden Empire Precision Machinery Technology Co., Ltd.'s (SHSE:603270) Stock Up Recently?

Shandong Golden Empire Precision Machinery Technology (SHSE:603270) has had a great run on the share market with its stock up by a significant 39% over the last three months. 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 Shandong Golden Empire Precision Machinery Technology's ROE in this article.

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?

Return on equity 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 Shandong Golden Empire Precision Machinery Technology is:

4.1% = CN¥89m ÷ CN¥2.2b (Based on the trailing twelve months to September 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¥0.04 in profit.

See our latest analysis for Shandong Golden Empire Precision Machinery Technology

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Shandong Golden Empire Precision Machinery Technology's Earnings Growth And 4.1% ROE

It is quite clear that Shandong Golden Empire Precision Machinery Technology's ROE is rather low. Even when compared to the industry average of 6.4%, the ROE figure is pretty disappointing. Shandong Golden Empire Precision Machinery Technology was still able to see a decent net income growth of 7.3% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Shandong Golden Empire Precision Machinery Technology's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 7.1% 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Shandong Golden Empire Precision Machinery Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shandong Golden Empire Precision Machinery Technology Using Its Retained Earnings Effectively?

Shandong Golden Empire Precision Machinery Technology has a three-year median payout ratio of 41%, which implies that it retains the remaining 59% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

While Shandong Golden Empire Precision Machinery Technology has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

In total, it does look like Shandong Golden Empire Precision Machinery Technology has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 4 risks we have identified for Shandong Golden Empire Precision Machinery Technology visit our risks dashboard for free.

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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.