Can Mixed Fundamentals Have A Negative Impact on Henan Thinker Automatic Equipment Co.,Ltd. (SHSE:603508) Current Share Price Momentum?

Henan Thinker Automatic EquipmentLtd's (SHSE:603508) stock is up by a considerable 20% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Henan Thinker Automatic EquipmentLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Henan Thinker Automatic EquipmentLtd

How Is ROE Calculated?

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 Henan Thinker Automatic EquipmentLtd is:

9.8% = CN¥449m ÷ CN¥4.6b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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 Henan Thinker Automatic EquipmentLtd's Earnings Growth And 9.8% ROE

On the face of it, Henan Thinker Automatic EquipmentLtd's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 6.8% doesn't go unnoticed by us. However, Henan Thinker Automatic EquipmentLtd's five year net income growth was quite low averaging at only 2.1%. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the low earnings growth.

Next, on comparing with the industry net income growth, we found that Henan Thinker Automatic EquipmentLtd's reported growth was lower than the industry growth of 8.4% over the last few years, which is not something we like to see.

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. Is Henan Thinker Automatic EquipmentLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Henan Thinker Automatic EquipmentLtd Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 60% (or a retention ratio of 40%), most of Henan Thinker Automatic EquipmentLtd's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Henan Thinker Automatic EquipmentLtd has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 60% of its profits over the next three years. Accordingly, forecasts suggest that Henan Thinker Automatic EquipmentLtd's future ROE will be 10% which is again, similar to the current ROE.

Conclusion

In total, we're a bit ambivalent about Henan Thinker Automatic EquipmentLtd's performance. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.