Himile Mechanical Science and Technology (Shandong) Co., Ltd's (SZSE:002595) Stock Is Going Strong: Is the Market Following Fundamentals?

Himile Mechanical Science and Technology (Shandong)'s (SZSE:002595) stock is up by a considerable 20% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Himile Mechanical Science and Technology (Shandong)'s ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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

How To Calculate Return On Equity?

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 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 profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.19 in profit.

What Has ROE Got To Do With 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.

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. Further, the company's ROE compares quite favorably to the industry average of 6.3%. This probably laid the ground for Himile Mechanical Science and Technology (Shandong)'s moderate 15% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Himile Mechanical Science and Technology (Shandong)'s growth is quite high when compared to the industry average growth of 7.1% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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) Using Its Retained Earnings Effectively?

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.

Besides, Himile Mechanical Science and Technology (Shandong) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 29% of its profits over the next three years. 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. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.

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

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.