Declining Stock and Solid Fundamentals: Is The Market Wrong About Hefei Meyer Optoelectronic Technology Inc. (SZSE:002690)?

Hefei Meyer Optoelectronic Technology (SZSE:002690) has had a rough three months with its share price down 14%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Hefei Meyer Optoelectronic Technology's ROE in this article.

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.

Check out our latest analysis for Hefei Meyer Optoelectronic Technology

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 Hefei Meyer Optoelectronic Technology is:

26% = CN¥721m ÷ CN¥2.8b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax 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¥0.26.

Why Is ROE Important For 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.

Hefei Meyer Optoelectronic Technology's Earnings Growth And 26% ROE

Firstly, we acknowledge that Hefei Meyer Optoelectronic Technology has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 6.9% also doesn't go unnoticed by us. This probably laid the groundwork for Hefei Meyer Optoelectronic Technology's moderate 10% net income growth seen over the past five years.

We then performed a comparison between Hefei Meyer Optoelectronic Technology's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.5% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is 002690 worth today? The intrinsic value infographic in our free research report helps visualize whether 002690 is currently mispriced by the market.

Is Hefei Meyer Optoelectronic Technology Using Its Retained Earnings Effectively?

While Hefei Meyer Optoelectronic Technology has a three-year median payout ratio of 86% (which means it retains 14% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Hefei Meyer Optoelectronic Technology 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.

Summary

In total, we are pretty happy with Hefei Meyer Optoelectronic Technology's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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