Is Suzhou Hengmingda Electronic Technology Co., Ltd.'s (SZSE:002947) Latest Stock Performance A Reflection Of Its Financial Health?

Suzhou Hengmingda Electronic Technology (SZSE:002947) has had a great run on the share market with its stock up by a significant 44% 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. Specifically, we decided to study Suzhou Hengmingda Electronic Technology's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Suzhou Hengmingda Electronic Technology

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 Suzhou Hengmingda Electronic Technology is:

15% = CN¥311m ÷ CN¥2.1b (Based on the trailing twelve months to March 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¥0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Suzhou Hengmingda Electronic Technology's Earnings Growth And 15% ROE

At first glance, Suzhou Hengmingda Electronic Technology seems to have a decent ROE. Especially when compared to the industry average of 6.3% the company's ROE looks pretty impressive. This probably laid the ground for Suzhou Hengmingda Electronic Technology's moderate 15% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Suzhou Hengmingda Electronic Technology's growth is quite high when compared to the industry average growth of 6.4% 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. If you're wondering about Suzhou Hengmingda Electronic Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Suzhou Hengmingda Electronic Technology Using Its Retained Earnings Effectively?

Suzhou Hengmingda Electronic Technology has a three-year median payout ratio of 39%, which implies that it retains the remaining 61% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Suzhou Hengmingda Electronic Technology has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Suzhou Hengmingda Electronic Technology's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard will have the 1 risk we have identified for Suzhou Hengmingda Electronic Technology.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com