Is WindSun Science&Technology Co.,Ltd.'s (SHSE:688663) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that WindSun Science&TechnologyLtd's (SHSE:688663) stock increased significantly by 19% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on WindSun Science&TechnologyLtd's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for WindSun Science&TechnologyLtd

How Is ROE Calculated?

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 WindSun Science&TechnologyLtd is:

12% = CN¥167m ÷ CN¥1.3b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.12.

What Is The Relationship Between ROE And 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 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.

WindSun Science&TechnologyLtd's Earnings Growth And 12% ROE

To start with, WindSun Science&TechnologyLtd's ROE looks acceptable. Especially when compared to the industry average of 6.5% the company's ROE looks pretty impressive. This probably laid the ground for WindSun Science&TechnologyLtd's moderate 13% net income growth seen over the past five years.

We then compared WindSun Science&TechnologyLtd'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 10% 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. 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 WindSun Science&TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is WindSun Science&TechnologyLtd Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 42% (implying that the company retains 58% of its profits), it seems that WindSun Science&TechnologyLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, WindSun Science&TechnologyLtd is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Conclusion

On the whole, we feel that WindSun Science&TechnologyLtd's 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.

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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.