Xi'an Bright Laser Technologies Co.,Ltd.'s (SHSE:688333) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Xi'an Bright Laser TechnologiesLtd (SHSE:688333) has had a rough three months with its share price down 9.0%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Xi'an Bright Laser TechnologiesLtd's ROE.

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.

See our latest analysis for Xi'an Bright Laser TechnologiesLtd

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Xi'an Bright Laser TechnologiesLtd is:

3.6% = CN¥171m ÷ CN¥4.8b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Xi'an Bright Laser TechnologiesLtd's Earnings Growth And 3.6% ROE

It is quite clear that Xi'an Bright Laser TechnologiesLtd's ROE is rather low. Even compared to the average industry ROE of 6.8%, the company's ROE is quite dismal. However, the moderate 19% net income growth seen by Xi'an Bright Laser TechnologiesLtd over the past five years is definitely a positive. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Xi'an Bright Laser TechnologiesLtd's 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 9.5%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Xi'an Bright Laser TechnologiesLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Xi'an Bright Laser TechnologiesLtd Efficiently Re-investing Its Profits?

In Xi'an Bright Laser TechnologiesLtd's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 10.0% (or a retention ratio of 90%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Xi'an Bright Laser TechnologiesLtd has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we feel that Xi'an Bright Laser TechnologiesLtd certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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