Wanxiang Qianchao Co.,Ltd.'s (SZSE:000559) Stock Has Shown A Decent Performance: Have Financials A Role To Play?

Wanxiang QianchaoLtd's (SZSE:000559) stock is up by 9.8% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Wanxiang QianchaoLtd's 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Wanxiang QianchaoLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Wanxiang QianchaoLtd is:

10% = CN¥943m ÷ CN¥9.3b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.10 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. 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.

Wanxiang QianchaoLtd's Earnings Growth And 10% ROE

On the face of it, Wanxiang QianchaoLtd's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 8.3% which we definitely can't overlook. Consequently, this likely laid the ground for the decent growth of 15% seen over the past five years by Wanxiang QianchaoLtd. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

We then compared Wanxiang QianchaoLtd'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.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Wanxiang QianchaoLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wanxiang QianchaoLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 75% (or a retention ratio of 25%) for Wanxiang QianchaoLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Wanxiang QianchaoLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, it does look like Wanxiang QianchaoLtd has some positive aspects to its business. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Wanxiang QianchaoLtd 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.