Are Strong Financial Prospects The Force That Is Driving The Momentum In Ningbo Yongxin Optics Co.,Ltd's SHSE:603297) Stock?

Ningbo Yongxin OpticsLtd's (SHSE:603297) stock is up by a considerable 23% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Ningbo Yongxin OpticsLtd's ROE.

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.

Check out our latest analysis for Ningbo Yongxin OpticsLtd

How Do You 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 Ningbo Yongxin OpticsLtd is:

12% = CN¥218m ÷ CN¥1.8b (Based on the trailing twelve months to June 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.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Ningbo Yongxin OpticsLtd's Earnings Growth And 12% ROE

To start with, Ningbo Yongxin OpticsLtd's ROE looks acceptable. On comparing with the average industry ROE of 6.4% the company's ROE looks pretty remarkable. This probably laid the ground for Ningbo Yongxin OpticsLtd's moderate 12% net income growth seen over the past five years.

As a next step, we compared Ningbo Yongxin OpticsLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.7%.

Earnings growth is a huge factor in stock valuation. 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. Is 603297 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Ningbo Yongxin OpticsLtd Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 41% (implying that the company retains 59% of its profits), it seems that Ningbo Yongxin OpticsLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Ningbo Yongxin OpticsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 31% over the next three years. As a result, the expected drop in Ningbo Yongxin OpticsLtd's payout ratio explains the anticipated rise in the company's future ROE to 17%, over the same period.

Summary

On the whole, we feel that Ningbo Yongxin OpticsLtd's performance has been quite good. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.