Are Robust Financials Driving The Recent Rally In AVIC Shenyang Aircraft Company Limited's (SHSE:600760) Stock?

AVIC Shenyang Aircraft's (SHSE:600760) stock is up by a considerable 26% 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. Specifically, we decided to study AVIC Shenyang Aircraft's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for AVIC Shenyang Aircraft

How Is ROE Calculated?

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 AVIC Shenyang Aircraft is:

14% = CN¥2.5b ÷ CN¥17b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.14 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.

AVIC Shenyang Aircraft's Earnings Growth And 14% ROE

At first glance, AVIC Shenyang Aircraft seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 5.0%. Probably as a result of this, AVIC Shenyang Aircraft was able to see an impressive net income growth of 22% over the last five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that AVIC Shenyang Aircraft's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

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. Is AVIC Shenyang Aircraft fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is AVIC Shenyang Aircraft Using Its Retained Earnings Effectively?

The three-year median payout ratio for AVIC Shenyang Aircraft is 35%, which is moderately low. The company is retaining the remaining 65%. By the looks of it, the dividend is well covered and AVIC Shenyang Aircraft is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, AVIC Shenyang Aircraft has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with AVIC Shenyang Aircraft'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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.