Changzhou Xingyu Automotive Lighting Systems Co.,Ltd.'s (SHSE:601799) Stock Has Fared Decently: Is the Market Following Strong Financials?

Changzhou Xingyu Automotive Lighting SystemsLtd's (SHSE:601799) stock is up by 3.8% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Changzhou Xingyu Automotive Lighting SystemsLtd'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Changzhou Xingyu Automotive Lighting SystemsLtd

How To Calculate Return On Equity?

Return on equity 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 Changzhou Xingyu Automotive Lighting SystemsLtd is:

13% = CN¥1.3b ÷ CN¥9.7b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.13.

What Is The Relationship Between ROE And 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.

Changzhou Xingyu Automotive Lighting SystemsLtd's Earnings Growth And 13% ROE

At first glance, Changzhou Xingyu Automotive Lighting SystemsLtd seems to have a decent ROE. Especially when compared to the industry average of 8.3% the company's ROE looks pretty impressive. This probably laid the ground for Changzhou Xingyu Automotive Lighting SystemsLtd's moderate 5.2% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Changzhou Xingyu Automotive Lighting SystemsLtd's reported growth was lower than the industry growth of 9.2% over the last few years, which is not something we like to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Changzhou Xingyu Automotive Lighting SystemsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Changzhou Xingyu Automotive Lighting SystemsLtd Making Efficient Use Of Its Profits?

Changzhou Xingyu Automotive Lighting SystemsLtd has a three-year median payout ratio of 32%, which implies that it retains the remaining 68% 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.

Moreover, Changzhou Xingyu Automotive Lighting SystemsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 27%. Regardless, the future ROE for Changzhou Xingyu Automotive Lighting SystemsLtd is predicted to rise to 17% despite there being not much change expected in its payout ratio.

Summary

Overall, we are quite pleased with Changzhou Xingyu Automotive Lighting SystemsLtd's performance. 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 a good amount of growth in its earnings. 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.