Is Ningbo Orient Wires & Cables Co.,Ltd.'s (SHSE:603606) Recent Performance Tethered To Its Attractive Financial Prospects?

Ningbo Orient Wires & CablesLtd's (SHSE:603606) stock up by 6.6% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Ningbo Orient Wires & CablesLtd'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Ningbo Orient Wires & CablesLtd

How Is ROE Calculated?

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 Ningbo Orient Wires & CablesLtd is:

16% = CN¥1.0b ÷ CN¥6.3b (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¥0.16 in profit.

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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

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

To begin with, Ningbo Orient Wires & CablesLtd seems to have a respectable ROE. On comparing with the average industry ROE of 6.9% the company's ROE looks pretty remarkable. This probably laid the ground for Ningbo Orient Wires & CablesLtd's moderate 17% net income growth seen over the past five years.

We then compared Ningbo Orient Wires & CablesLtd'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 a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Ningbo Orient Wires & CablesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

Ningbo Orient Wires & CablesLtd's three-year median payout ratio to shareholders is 20% (implying that it retains 80% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Ningbo Orient Wires & CablesLtd has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 23% of its profits over the next three years. Regardless, the future ROE for Ningbo Orient Wires & CablesLtd is predicted to rise to 21% despite there being not much change expected in its payout ratio.

Conclusion

In total, we are pretty happy 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com