Shijiazhuang Kelin Electric Co., Ltd. (SHSE:603050) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

It is hard to get excited after looking at Shijiazhuang Kelin Electric's (SHSE:603050) recent performance, when its stock has declined 9.2% over the past week. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Shijiazhuang Kelin Electric'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Shijiazhuang Kelin Electric

How To Calculate Return On Equity?

ROE 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 Shijiazhuang Kelin Electric is:

20% = CN¥334m ÷ CN¥1.7b (Based on the trailing twelve months to June 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¥0.20 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Shijiazhuang Kelin Electric's Earnings Growth And 20% ROE

To begin with, Shijiazhuang Kelin Electric seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.9%. This certainly adds some context to Shijiazhuang Kelin Electric's exceptional 26% net income growth seen over the past 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.

We then compared Shijiazhuang Kelin Electric'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 12% 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. If you're wondering about Shijiazhuang Kelin Electric's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shijiazhuang Kelin Electric Making Efficient Use Of Its Profits?

Shijiazhuang Kelin Electric's three-year median payout ratio is a pretty moderate 36%, meaning the company retains 64% of its income. So it seems that Shijiazhuang Kelin Electric is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Shijiazhuang Kelin Electric is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Summary

In total, we are pretty happy with Shijiazhuang Kelin Electric'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Shijiazhuang Kelin Electric.

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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.