Is Western Superconducting Technologies Co., Ltd.'s (SHSE:688122) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that Western Superconducting Technologies' (SHSE:688122) stock increased significantly by 45% over the past month. 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. Specifically, we decided to study Western Superconducting Technologies' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Western Superconducting Technologies

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Western Superconducting Technologies is:

10% = CN¥685m ÷ CN¥6.8b (Based on the trailing twelve months to June 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¥0.10 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Western Superconducting Technologies' Earnings Growth And 10% ROE

When you first look at it, Western Superconducting Technologies' ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 7.7%, is definitely interesting. Particularly, the substantial 28% net income growth seen by Western Superconducting Technologies over the past five years is impressive . Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing with the industry net income growth, we found that Western Superconducting Technologies' growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

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. Is Western Superconducting Technologies fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Western Superconducting Technologies Using Its Retained Earnings Effectively?

The three-year median payout ratio for Western Superconducting Technologies is 49%, which is moderately low. The company is retaining the remaining 51%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Western Superconducting Technologies is reinvesting its earnings efficiently.

Moreover, Western Superconducting Technologies is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Conclusion

Overall, we are quite pleased with Western Superconducting Technologies' performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.