Could The Market Be Wrong About Changzhou Xingyu Automotive Lighting Systems Co.,Ltd. (SHSE:601799) Given Its Attractive Financial Prospects?

Changzhou Xingyu Automotive Lighting SystemsLtd (SHSE:601799) has had a rough three months with its share price down 8.9%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Changzhou Xingyu Automotive Lighting SystemsLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Changzhou Xingyu Automotive Lighting SystemsLtd

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 Changzhou Xingyu Automotive Lighting SystemsLtd is:

12% = CN¥1.1b ÷ CN¥9.4b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned 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¥0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Changzhou Xingyu Automotive Lighting SystemsLtd's Earnings Growth And 12% 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 6.1% 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 8.9% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Changzhou Xingyu Automotive Lighting SystemsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

Changzhou Xingyu Automotive Lighting SystemsLtd has a healthy combination of a moderate three-year median payout ratio of 32% (or a retention ratio of 68%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, Changzhou Xingyu Automotive Lighting SystemsLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 28%. However, Changzhou Xingyu Automotive Lighting SystemsLtd's ROE is predicted to rise to 16% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with Changzhou Xingyu Automotive Lighting SystemsLtd'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 respectable 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.