State Power Rixin Technology Co., Ltd.'s (SZSE:301162) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

State Power Rixin Technology (SZSE:301162) has had a great run on the share market with its stock up by a significant 25% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study State Power Rixin Technology'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 State Power Rixin Technology

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for State Power Rixin Technology is:

7.4% = CN¥86m ÷ CN¥1.2b (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¥0.07 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

State Power Rixin Technology's Earnings Growth And 7.4% ROE

On the face of it, State Power Rixin Technology's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 4.5% which we definitely can't overlook. This certainly adds some context to State Power Rixin Technology's moderate 16% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

We then compared State Power Rixin Technology'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 1.1% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about State Power Rixin Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is State Power Rixin Technology Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 50% (or a retention ratio of 50%) for State Power Rixin Technology suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, State Power Rixin Technology is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 52%. Regardless, the future ROE for State Power Rixin Technology is predicted to rise to 13% despite there being not much change expected in its payout ratio.

Summary

In total, it does look like State Power Rixin Technology has some positive aspects to its business. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. 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.