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

Anhui Yingliu Electromechanical (SHSE:603308) has had a great run on the share market with its stock up by a significant 32% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Anhui Yingliu Electromechanical's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Anhui Yingliu Electromechanical

How Do You 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:

5.8% = CN¥290m ÷ CN¥5.0b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings 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¥0.06 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.

Anhui Yingliu Electromechanical's Earnings Growth And 5.8% ROE

At first glance, Anhui Yingliu Electromechanical's ROE doesn't look very promising. However, its ROE is similar to the industry average of 6.9%, so we won't completely dismiss the company. Looking at Anhui Yingliu Electromechanical's exceptional 27% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Anhui Yingliu Electromechanical'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 10%.

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?

Anhui Yingliu Electromechanical has a three-year median payout ratio of 27% (where it is retaining 73% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Anhui Yingliu Electromechanical is reinvesting its earnings efficiently.

Additionally, Anhui Yingliu Electromechanical has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 26% of its profits over the next three years. However, Anhui Yingliu Electromechanical's ROE is predicted to rise to 10.0% despite there being no anticipated change in its payout ratio.

Summary

In total, it does look like Anhui Yingliu Electromechanical has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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.