Are Strong Financial Prospects The Force That Is Driving The Momentum In Himile Mechanical Science and Technology (Shandong) Co., Ltd's SZSE:002595) Stock?

Most readers would already be aware that Himile Mechanical Science and Technology (Shandong)'s (SZSE:002595) stock increased significantly by 16% 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. Particularly, we will be paying attention to Himile Mechanical Science and Technology (Shandong)'s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Himile Mechanical Science and Technology (Shandong)

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Himile Mechanical Science and Technology (Shandong) is:

19% = CN¥1.9b ÷ CN¥9.6b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.19 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Himile Mechanical Science and Technology (Shandong)'s Earnings Growth And 19% ROE

At first glance, Himile Mechanical Science and Technology (Shandong) seems to have a decent ROE. On comparing with the average industry ROE of 6.3% the company's ROE looks pretty remarkable. This certainly adds some context to Himile Mechanical Science and Technology (Shandong)'s decent 15% net income growth seen over the past five years.

As a next step, we compared Himile Mechanical Science and Technology (Shandong)'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 7.3%.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is 002595 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Himile Mechanical Science and Technology (Shandong) Making Efficient Use Of Its Profits?

Himile Mechanical Science and Technology (Shandong) has a healthy combination of a moderate three-year median payout ratio of 29% (or a retention ratio of 71%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Himile Mechanical Science and Technology (Shandong) has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 27%. Accordingly, forecasts suggest that Himile Mechanical Science and Technology (Shandong)'s future ROE will be 19% which is again, similar to the current ROE.

Summary

On the whole, we feel that Himile Mechanical Science and Technology (Shandong)'s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.