China Automotive Engineering Research Institute Co., Ltd.'s (SHSE:601965) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

China Automotive Engineering Research Institute (SHSE:601965) has had a rough month with its share price down 6.0%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to China Automotive Engineering Research Institute's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for China Automotive Engineering Research Institute

How Is ROE Calculated?

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 China Automotive Engineering Research Institute is:

13% = CN¥882m ÷ CN¥7.0b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.13 in profit.

What Is The Relationship Between ROE And 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. 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.

China Automotive Engineering Research Institute's Earnings Growth And 13% ROE

At first glance, China Automotive Engineering Research Institute seems to have a decent ROE. Especially when compared to the industry average of 5.9% the company's ROE looks pretty impressive. This certainly adds some context to China Automotive Engineering Research Institute's decent 14% net income growth seen over the past five years.

Next, on comparing China Automotive Engineering Research Institute's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 601965? You can find out in our latest intrinsic value infographic research report.

Is China Automotive Engineering Research Institute Making Efficient Use Of Its Profits?

China Automotive Engineering Research Institute has a three-year median payout ratio of 41%, which implies that it retains the remaining 59% 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, China Automotive Engineering Research Institute 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 38% of its profits over the next three years. Regardless, the future ROE for China Automotive Engineering Research Institute is predicted to rise to 16% despite there being not much change expected in its payout ratio.

Summary

Overall, we are quite pleased with China Automotive Engineering Research Institute'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. 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.