Stock Analysis

Is Shenzhen Megmeet Electrical Co., LTD's (SZSE:002851) Latest Stock Performance A Reflection Of Its Financial Health?

SZSE:002851
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Shenzhen Megmeet Electrical's (SZSE:002851) stock is up by a considerable 67% 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. Specifically, we decided to study Shenzhen Megmeet Electrical's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Shenzhen Megmeet Electrical

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 Shenzhen Megmeet Electrical is:

12% = CN¥569m ÷ CN¥4.9b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Shenzhen Megmeet Electrical's Earnings Growth And 12% ROE

To start with, Shenzhen Megmeet Electrical's ROE looks acceptable. On comparing with the average industry ROE of 6.4% the company's ROE looks pretty remarkable. Probably as a result of this, Shenzhen Megmeet Electrical was able to see a decent growth of 12% over the last five years.

We then compared Shenzhen Megmeet Electrical'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.

past-earnings-growth
SZSE:002851 Past Earnings Growth January 20th 2025

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shenzhen Megmeet Electrical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shenzhen Megmeet Electrical Efficiently Re-investing Its Profits?

Shenzhen Megmeet Electrical's three-year median payout ratio to shareholders is 19% (implying that it retains 81% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Shenzhen Megmeet Electrical is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Conclusion

In total, we are pretty happy with Shenzhen Megmeet Electrical's performance. 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. 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.