L&K Engineering (Suzhou) Co.,Ltd.'s (SHSE:603929) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

L&K Engineering (Suzhou)Ltd (SHSE:603929) has had a rough three months with its share price down 12%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on L&K Engineering (Suzhou)Ltd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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

How Is ROE Calculated?

The formula for ROE is:

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:

24% = CN¥376m ÷ CN¥1.6b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.24 in profit.

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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

L&K Engineering (Suzhou)Ltd's Earnings Growth And 24% ROE

Firstly, we acknowledge that L&K Engineering (Suzhou)Ltd has a significantly high ROE. Secondly, even when compared to the industry average of 7.3% the company's ROE is quite impressive. So, the substantial 36% net income growth seen by L&K Engineering (Suzhou)Ltd over the past five years isn't overly surprising.

We then compared L&K Engineering (Suzhou)Ltd'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 7.8% in the same 5-year period.

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. Is L&K Engineering (Suzhou)Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

L&K Engineering (Suzhou)Ltd's three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like L&K Engineering (Suzhou)Ltd is reinvesting its earnings efficiently.

Moreover, L&K Engineering (Suzhou)Ltd is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Conclusion

In total, we are pretty happy with L&K Engineering (Suzhou)Ltd'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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com