Jiangsu Hengli Hydraulic Co.,Ltd's (SHSE:601100) Stock Is Going Strong: Is the Market Following Fundamentals?

Jiangsu Hengli HydraulicLtd (SHSE:601100) has had a great run on the share market with its stock up by a significant 18% over the last month. 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. In this article, we decided to focus on Jiangsu Hengli HydraulicLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Jiangsu Hengli HydraulicLtd

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Jiangsu Hengli HydraulicLtd is:

17% = CN¥2.5b ÷ CN¥15b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.17.

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. 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 Jiangsu Hengli HydraulicLtd's Earnings Growth And 17% ROE

To start with, Jiangsu Hengli HydraulicLtd's ROE looks acceptable. Especially when compared to the industry average of 6.9% the company's ROE looks pretty impressive. This probably laid the ground for Jiangsu Hengli HydraulicLtd's moderate 12% net income growth seen over the past five years.

We then compared Jiangsu Hengli HydraulicLtd'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 9.0% in the same 5-year period.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is 601100 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Jiangsu Hengli HydraulicLtd Using Its Retained Earnings Effectively?

Jiangsu Hengli HydraulicLtd has a three-year median payout ratio of 35%, which implies that it retains the remaining 65% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Jiangsu Hengli HydraulicLtd 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 36%. As a result, Jiangsu Hengli HydraulicLtd's ROE is not expected to change by much either, which we inferred from the analyst estimate of 19% for future ROE.

Summary

Overall, we are quite pleased with Jiangsu Hengli HydraulicLtd'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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.