Is Xiamen Solex High-tech Industries Co., Ltd.'s (SHSE:603992) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Xiamen Solex High-tech Industries' (SHSE:603992) stock increased significantly by 22% 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 Xiamen Solex High-tech Industries' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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 Xiamen Solex High-tech Industries is:

16% = CN¥448m ÷ CN¥2.7b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.16.

Check out our latest analysis for Xiamen Solex High-tech Industries

Why Is ROE Important For 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. 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.

Xiamen Solex High-tech Industries' Earnings Growth And 16% ROE

To start with, Xiamen Solex High-tech Industries' ROE looks acceptable. On comparing with the average industry ROE of 7.5% the company's ROE looks pretty remarkable. This certainly adds some context to Xiamen Solex High-tech Industries' decent 11% net income growth seen over the past five years.

As a next step, we compared Xiamen Solex High-tech Industries' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.8%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Xiamen Solex High-tech Industries is trading on a high P/E or a low P/E, relative to its industry.

Is Xiamen Solex High-tech Industries Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 34% (implying that the company retains 66% of its profits), it seems that Xiamen Solex High-tech Industries is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Xiamen Solex High-tech Industries is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Conclusion

On the whole, we feel that Xiamen Solex High-tech Industries' performance has been quite good. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.