Declining Stock and Solid Fundamentals: Is The Market Wrong About Ningbo Orient Wires & Cables Co.,Ltd. (SHSE:603606)?

Ningbo Orient Wires & CablesLtd (SHSE:603606) has had a rough three months with its share price down 2.6%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Ningbo Orient Wires & CablesLtd's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Ningbo Orient Wires & CablesLtd

How Do You Calculate Return On Equity?

Return on equity 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 Ningbo Orient Wires & CablesLtd is:

16% = CN¥1.1b ÷ CN¥6.9b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.16.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Ningbo Orient Wires & CablesLtd's Earnings Growth And 16% ROE

To begin with, Ningbo Orient Wires & CablesLtd seems to have a respectable ROE. Especially when compared to the industry average of 6.4% the company's ROE looks pretty impressive. This probably laid the ground for Ningbo Orient Wires & CablesLtd's moderate 10% net income growth seen over the past five years.

We then performed a comparison between Ningbo Orient Wires & CablesLtd's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 10% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is 603606 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Ningbo Orient Wires & CablesLtd Using Its Retained Earnings Effectively?

Ningbo Orient Wires & CablesLtd's three-year median payout ratio to shareholders is 21% (implying that it retains 79% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Ningbo Orient Wires & CablesLtd 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 30% over the next three years. However, Ningbo Orient Wires & CablesLtd's future ROE is expected to rise to 22% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Summary

Overall, we are quite pleased with Ningbo Orient Wires & CablesLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.