AVIC Shenyang Aircraft Company Limited's (SHSE:600760) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 6.5% over the past three months, it is easy to disregard AVIC Shenyang Aircraft (SHSE:600760). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on AVIC Shenyang Aircraft's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for AVIC Shenyang Aircraft

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 AVIC Shenyang Aircraft is:

14% = CN¥2.5b ÷ CN¥17b (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¥0.14 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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

AVIC Shenyang Aircraft's Earnings Growth And 14% ROE

To start with, AVIC Shenyang Aircraft's ROE looks acceptable. Especially when compared to the industry average of 5.9% the company's ROE looks pretty impressive. This certainly adds some context to AVIC Shenyang Aircraft's exceptional 22% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared AVIC Shenyang Aircraft'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 11%.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about AVIC Shenyang Aircraft's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is AVIC Shenyang Aircraft Making Efficient Use Of Its Profits?

The three-year median payout ratio for AVIC Shenyang Aircraft is 36%, which is moderately low. The company is retaining the remaining 64%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like AVIC Shenyang Aircraft is reinvesting its earnings efficiently.

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

Conclusion

On the whole, we feel that AVIC Shenyang Aircraft's performance has been quite good. 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 are expected to accelerate. 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.