Anhui Yingliu Electromechanical Co., Ltd.'s (SHSE:603308) Stock Is Going Strong: Have Financials A Role To Play?

Anhui Yingliu Electromechanical's (SHSE:603308) stock is up by a considerable 25% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Anhui Yingliu Electromechanical's ROE.

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.

Check out our latest analysis for Anhui Yingliu Electromechanical

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 Anhui Yingliu Electromechanical is:

5.3% = CN¥264m ÷ CN¥5.0b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Anhui Yingliu Electromechanical's Earnings Growth And 5.3% ROE

At first glance, Anhui Yingliu Electromechanical's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.3%, we may spare it some thought. Looking at Anhui Yingliu Electromechanical's exceptional 20% five-year net income growth in particular, we are definitely impressed. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Anhui Yingliu Electromechanical'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 7.4% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Anhui Yingliu Electromechanical is trading on a high P/E or a low P/E, relative to its industry.

Is Anhui Yingliu Electromechanical Using Its Retained Earnings Effectively?

The three-year median payout ratio for Anhui Yingliu Electromechanical is 28%, which is moderately low. The company is retaining the remaining 72%. By the looks of it, the dividend is well covered and Anhui Yingliu Electromechanical is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Anhui Yingliu Electromechanical 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 25%. However, Anhui Yingliu Electromechanical's ROE is predicted to rise to 10% despite there being no anticipated change in its payout ratio.

Conclusion

In total, it does look like Anhui Yingliu Electromechanical has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.