Tofflon Science and Technology Group Co., Ltd.'s (SZSE:300171) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Tofflon Science and Technology Group (SZSE:300171) has had a great run on the share market with its stock up by a significant 22% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Tofflon Science and Technology Group's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Tofflon Science and Technology Group

How Do You 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 Tofflon Science and Technology Group is:

3.8% = CN¥307m ÷ CN¥8.0b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

Why Is ROE Important For 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 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.

Tofflon Science and Technology Group's Earnings Growth And 3.8% ROE

It is hard to argue that Tofflon Science and Technology Group's ROE is much good in and of itself. Even compared to the average industry ROE of 7.3%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Tofflon Science and Technology Group grew its net income at a significant rate of 21% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Tofflon Science and Technology Group's growth is quite high when compared to the industry average growth of 5.2% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Tofflon Science and Technology Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tofflon Science and Technology Group Making Efficient Use Of Its Profits?

The three-year median payout ratio for Tofflon Science and Technology Group is 27%, which is moderately low. The company is retaining the remaining 73%. So it seems that Tofflon Science and Technology Group is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Tofflon Science and Technology Group 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.

Summary

In total, it does look like Tofflon Science and Technology Group has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.