Is Shenzhen Inovance Technology Co.,Ltd's (SZSE:300124) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Shenzhen Inovance TechnologyLtd (SZSE:300124) has had a great run on the share market with its stock up by a significant 20% over the last 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 Shenzhen Inovance TechnologyLtd's ROE today.

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 Shenzhen Inovance TechnologyLtd

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 Shenzhen Inovance TechnologyLtd is:

18% = CN¥4.8b ÷ CN¥27b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings 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¥0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of Shenzhen Inovance TechnologyLtd's Earnings Growth And 18% ROE

To begin with, Shenzhen Inovance TechnologyLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.3%. This certainly adds some context to Shenzhen Inovance TechnologyLtd's exceptional 27% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Shenzhen Inovance TechnologyLtd's growth is quite high when compared to the industry average growth of 7.1% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Shenzhen Inovance TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shenzhen Inovance TechnologyLtd Using Its Retained Earnings Effectively?

Shenzhen Inovance TechnologyLtd's ' three-year median payout ratio is on the lower side at 22% implying that it is retaining a higher percentage (78%) of its profits. So it looks like Shenzhen Inovance TechnologyLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Shenzhen Inovance TechnologyLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 31% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

Overall, we are quite pleased with Shenzhen Inovance TechnologyLtd's performance. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.