Is Changchun Yidong Clutch CO.,LTD's (SHSE:600148) Recent Price Movement Underpinned By Its Weak Fundamentals?

It is hard to get excited after looking at Changchun Yidong ClutchLTD's (SHSE:600148) recent performance, when its stock has declined 17% over the past month. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Changchun Yidong ClutchLTD's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Changchun Yidong ClutchLTD

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 Changchun Yidong ClutchLTD is:

7.3% = CN¥23m ÷ CN¥316m (Based on the trailing twelve months to March 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¥0.07 in profit.

What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Changchun Yidong ClutchLTD's Earnings Growth And 7.3% ROE

At first glance, Changchun Yidong ClutchLTD's ROE doesn't look very promising. However, its ROE is similar to the industry average of 8.1%, so we won't completely dismiss the company. Having said that, Changchun Yidong ClutchLTD's five year net income decline rate was 36%. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

However, when we compared Changchun Yidong ClutchLTD's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 8.4% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Changchun Yidong ClutchLTD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Changchun Yidong ClutchLTD Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 47% (where it is retaining 53% of its profits), Changchun Yidong ClutchLTD has seen a decline in earnings as we saw above. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Additionally, Changchun Yidong ClutchLTD has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we have mixed feelings about Changchun Yidong ClutchLTD. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Changchun Yidong ClutchLTD.

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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.