Declining Stock and Decent Financials: Is The Market Wrong About Chongqing Changan Automobile Company Limited (SZSE:000625)?

It is hard to get excited after looking at Chongqing Changan Automobile's (SZSE:000625) recent performance, when its stock has declined 7.0% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Chongqing Changan Automobile's ROE.

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.

See our latest analysis for Chongqing Changan Automobile

How Do You 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 Chongqing Changan Automobile is:

4.6% = CN¥3.5b ÷ CN¥75b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

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. 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.

Chongqing Changan Automobile's Earnings Growth And 4.6% ROE

It is hard to argue that Chongqing Changan Automobile's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 4.6% either. However, the exceptional 38% net income growth seen by Chongqing Changan Automobile over the past five years is pretty remarkable. We reckon that there could also be other factors at play thats influencing the company's growth. Such as - high earnings retention or an efficient management in place.

We then compared Chongqing Changan Automobile'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 13% 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. Doing so will help them establish if the stock's future looks promising or ominous. Is Chongqing Changan Automobile fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chongqing Changan Automobile Making Efficient Use Of Its Profits?

Chongqing Changan Automobile's three-year median payout ratio is a pretty moderate 30%, meaning the company retains 71% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Chongqing Changan Automobile is reinvesting its earnings efficiently.

Additionally, Chongqing Changan Automobile has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 31% of its profits over the next three years. Still, forecasts suggest that Chongqing Changan Automobile's future ROE will rise to 7.2% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we feel that Chongqing Changan Automobile certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.