Do Its Financials Have Any Role To Play In Driving Shanghai Automobile Air-Conditioner Accessories Co., Ltd.'s (SHSE:603107) Stock Up Recently?

Shanghai Automobile Air-Conditioner Accessories' (SHSE:603107) stock is up by a considerable 18% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Shanghai Automobile Air-Conditioner Accessories' ROE today.

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 Shanghai Automobile Air-Conditioner Accessories

How Do You 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 Shanghai Automobile Air-Conditioner Accessories is:

8.3% = CN¥169m ÷ CN¥2.0b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

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 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.

A Side By Side comparison of Shanghai Automobile Air-Conditioner Accessories' Earnings Growth And 8.3% ROE

When you first look at it, Shanghai Automobile Air-Conditioner Accessories' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.3%. Having said that, Shanghai Automobile Air-Conditioner Accessories has shown a modest net income growth of 11% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Shanghai Automobile Air-Conditioner Accessories' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 9.2% over the last few years.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Shanghai Automobile Air-Conditioner Accessories''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shanghai Automobile Air-Conditioner Accessories Efficiently Re-investing Its Profits?

Shanghai Automobile Air-Conditioner Accessories has a significant three-year median payout ratio of 51%, meaning that it is left with only 49% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

While Shanghai Automobile Air-Conditioner Accessories has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

In total, it does look like Shanghai Automobile Air-Conditioner Accessories has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Up till now, we've only made a short study of the company's growth data. You can do your own research on Shanghai Automobile Air-Conditioner Accessories and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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

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.