Are Robust Financials Driving The Recent Rally In Bethel Automotive Safety Systems Co., Ltd's (SHSE:603596) Stock?

Bethel Automotive Safety Systems (SHSE:603596) has had a great run on the share market with its stock up by a significant 25% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Bethel Automotive Safety Systems' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Bethel Automotive Safety Systems

How Is ROE Calculated?

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 Bethel Automotive Safety Systems is:

16% = CN¥1.0b ÷ CN¥6.3b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.16 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Bethel Automotive Safety Systems' Earnings Growth And 16% ROE

At first glance, Bethel Automotive Safety Systems seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.5%. This probably laid the ground for Bethel Automotive Safety Systems' significant 22% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Bethel Automotive Safety Systems' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.9%.

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. 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 Bethel Automotive Safety Systems is trading on a high P/E or a low P/E, relative to its industry.

Is Bethel Automotive Safety Systems Making Efficient Use Of Its Profits?

Bethel Automotive Safety Systems has a really low three-year median payout ratio of 15%, meaning that it has the remaining 85% left over to reinvest into its business. So it looks like Bethel Automotive Safety Systems is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Bethel Automotive Safety Systems has been paying dividends over a period of five years. 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 16%. As a result, Bethel Automotive Safety Systems' ROE is not expected to change by much either, which we inferred from the analyst estimate of 19% for future ROE.

Conclusion

Overall, we are quite pleased with Bethel Automotive Safety Systems' 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 substantial growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.