Ningbo Gaofa Automotive Control System Co., Ltd.'s (SHSE:603788) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Ningbo Gaofa Automotive Control System (SHSE:603788) has had a great run on the share market with its stock up by a significant 14% over the last month. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Ningbo Gaofa Automotive Control System'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 Ningbo Gaofa Automotive Control System

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Ningbo Gaofa Automotive Control System is:

10.0% = CN¥203m ÷ CN¥2.0b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax 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¥0.10.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Ningbo Gaofa Automotive Control System's Earnings Growth And 10.0% ROE

On the face of it, Ningbo Gaofa Automotive Control System's ROE is not much to talk about. However, its ROE is similar to the industry average of 8.4%, so we won't completely dismiss the company. But Ningbo Gaofa Automotive Control System saw a five year net income decline of 2.4% over the past five years. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

So, as a next step, we compared Ningbo Gaofa Automotive Control System's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 9.3% 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. Is Ningbo Gaofa Automotive Control System fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ningbo Gaofa Automotive Control System Efficiently Re-investing Its Profits?

Ningbo Gaofa Automotive Control System has a high three-year median payout ratio of 82% (that is, it is retaining 18% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 2 risks we have identified for Ningbo Gaofa Automotive Control System visit our risks dashboard for free.

In addition, Ningbo Gaofa Automotive Control System has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Ningbo Gaofa Automotive Control System. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Ningbo Gaofa Automotive Control System and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.