Is Huizhou Desay SV Automotive Co., Ltd.'s (SZSE:002920) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Huizhou Desay SV Automotive's (SZSE:002920) stock is up by a considerable 34% over the past 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. Particularly, we will be paying attention to Huizhou Desay SV Automotive'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Huizhou Desay SV Automotive

How Do You Calculate Return On Equity?

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 Huizhou Desay SV Automotive is:

21% = CN¥1.8b ÷ CN¥8.5b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings 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¥0.21 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Huizhou Desay SV Automotive's Earnings Growth And 21% ROE

To start with, Huizhou Desay SV Automotive's ROE looks acceptable. On comparing with the average industry ROE of 8.5% the company's ROE looks pretty remarkable. This certainly adds some context to Huizhou Desay SV Automotive's exceptional 35% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Huizhou Desay SV Automotive'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 9.9% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Huizhou Desay SV Automotive is trading on a high P/E or a low P/E, relative to its industry.

Is Huizhou Desay SV Automotive Using Its Retained Earnings Effectively?

The three-year median payout ratio for Huizhou Desay SV Automotive is 25%, which is moderately low. The company is retaining the remaining 75%. By the looks of it, the dividend is well covered and Huizhou Desay SV Automotive is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Huizhou Desay SV Automotive has been paying dividends over a period of six 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 29%. Still, forecasts suggest that Huizhou Desay SV Automotive's future ROE will rise to 27% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we are quite pleased with Huizhou Desay SV Automotive's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.