Will Weakness in AVIC Heavy Machinery Co., Ltd.'s (SHSE:600765) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at AVIC Heavy Machinery's (SHSE:600765) recent performance, when its stock has declined 19% over the past three months. 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. Particularly, we will be paying attention to AVIC Heavy Machinery's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for AVIC Heavy Machinery

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 Heavy Machinery is:

10% = CN¥1.3b ÷ CN¥13b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.10.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of AVIC Heavy Machinery's Earnings Growth And 10% ROE

At first glance, AVIC Heavy Machinery's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 6.9%, is definitely interesting. Especially when you consider AVIC Heavy Machinery's exceptional 34% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared AVIC Heavy Machinery'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 9.0%.

Earnings growth is an important metric to consider when valuing a stock. 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. What is 600765 worth today? The intrinsic value infographic in our free research report helps visualize whether 600765 is currently mispriced by the market.

Is AVIC Heavy Machinery Making Efficient Use Of Its Profits?

AVIC Heavy Machinery has a really low three-year median payout ratio of 18%, meaning that it has the remaining 82% left over to reinvest into its business. So it looks like AVIC Heavy Machinery is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, AVIC Heavy Machinery is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

On the whole, we feel that AVIC Heavy Machinery's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.