Ningbo Shuanglin Auto Parts Co.,Ltd.'s (SZSE:300100) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Ningbo Shuanglin Auto PartsLtd's (SZSE:300100) stock is up by a considerable 30% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Ningbo Shuanglin Auto PartsLtd'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.

Check out our latest analysis for Ningbo Shuanglin Auto PartsLtd

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 Ningbo Shuanglin Auto PartsLtd is:

5.2% = CN¥118m ÷ CN¥2.2b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

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. 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.

Ningbo Shuanglin Auto PartsLtd's Earnings Growth And 5.2% ROE

When you first look at it, Ningbo Shuanglin Auto PartsLtd's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 8.2% either. In spite of this, Ningbo Shuanglin Auto PartsLtd was able to grow its net income considerably, at a rate of 58% in the last five years. So, there might be other aspects that are positively influencing the company's earnings 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.

As a next step, we compared Ningbo Shuanglin Auto PartsLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.7%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Ningbo Shuanglin Auto PartsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ningbo Shuanglin Auto PartsLtd Efficiently Re-investing Its Profits?

Ningbo Shuanglin Auto PartsLtd has very a high three-year median payout ratio of 225% suggesting that the company's shareholders are getting paid from more than just the company's earnings. However, this hasn't hampered its ability to grow as we saw earlier. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk. Our risks dashboard should have the 2 risks we have identified for Ningbo Shuanglin Auto PartsLtd.

Additionally, Ningbo Shuanglin Auto PartsLtd 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.

Summary

On the whole, we feel that the performance shown by Ningbo Shuanglin Auto PartsLtd can be open to many interpretations. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Ningbo Shuanglin Auto PartsLtd's past profit growth, check out this visualization 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.

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