Wuxi Zhenhua Auto Parts Co.,Ltd.'s (SHSE:605319) Stock Is Going Strong: Is the Market Following Fundamentals?

Wuxi Zhenhua Auto PartsLtd's (SHSE:605319) stock is up by a considerable 44% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Wuxi Zhenhua Auto PartsLtd's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Wuxi Zhenhua Auto PartsLtd

How To Calculate Return On Equity?

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 Wuxi Zhenhua Auto PartsLtd is:

16% = CN¥361m ÷ CN¥2.3b (Based on the trailing twelve months to September 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¥0.16 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. 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. 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.

Wuxi Zhenhua Auto PartsLtd's Earnings Growth And 16% ROE

To start with, Wuxi Zhenhua Auto PartsLtd's ROE looks acceptable. On comparing with the average industry ROE of 8.3% the company's ROE looks pretty remarkable. This probably laid the ground for Wuxi Zhenhua Auto PartsLtd's significant 33% net income growth seen over the past five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Wuxi Zhenhua Auto PartsLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.2% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Wuxi Zhenhua Auto PartsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wuxi Zhenhua Auto PartsLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Wuxi Zhenhua Auto PartsLtd is 40%, which is moderately low. The company is retaining the remaining 60%. So it seems that Wuxi Zhenhua Auto PartsLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Wuxi Zhenhua Auto PartsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Conclusion

Overall, we are quite pleased with Wuxi Zhenhua Auto PartsLtd'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, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.