Are Robust Financials Driving The Recent Rally In L&K Engineering (Suzhou) Co.,Ltd.'s (SHSE:603929) Stock?

L&K Engineering (Suzhou)Ltd's (SHSE:603929) stock is up by a considerable 17% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study L&K Engineering (Suzhou)Ltd'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for L&K Engineering (Suzhou)Ltd

How Is ROE Calculated?

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 L&K Engineering (Suzhou)Ltd is:

29% = CN¥498m ÷ CN¥1.7b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.29 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

L&K Engineering (Suzhou)Ltd's Earnings Growth And 29% ROE

Firstly, we acknowledge that L&K Engineering (Suzhou)Ltd has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 6.9% which is quite remarkable. Under the circumstances, L&K Engineering (Suzhou)Ltd's considerable five year net income growth of 56% was to be expected.

Next, on comparing with the industry net income growth, we found that L&K Engineering (Suzhou)Ltd's growth is quite high when compared to the industry average growth of 6.4% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about L&K Engineering (Suzhou)Ltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is L&K Engineering (Suzhou)Ltd Using Its Retained Earnings Effectively?

L&K Engineering (Suzhou)Ltd has a three-year median payout ratio of 43% (where it is retaining 57% of its income) which is not too low or not too high. So it seems that L&K Engineering (Suzhou)Ltd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, L&K Engineering (Suzhou)Ltd has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 70% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with L&K Engineering (Suzhou)Ltd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.