Is Weakness In Ningbo Orient Wires & Cables Co.,Ltd. (SHSE:603606) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Ningbo Orient Wires & CablesLtd (SHSE:603606) has had a rough three months with its share price down 6.5%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Ningbo Orient Wires & CablesLtd's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out 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:

15% = CN¥1.0b ÷ CN¥6.6b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.15 in profit.

Why Is ROE Important For 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.

Ningbo Orient Wires & CablesLtd's Earnings Growth And 15% ROE

At first glance, Ningbo Orient Wires & CablesLtd seems to have a decent ROE. On comparing with the average industry ROE of 6.9% the company's ROE looks pretty remarkable. This certainly adds some context to Ningbo Orient Wires & CablesLtd's decent 13% net income growth seen over the past five years.

As a next step, we compared Ningbo Orient Wires & CablesLtd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 12% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Ningbo Orient Wires & CablesLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ningbo Orient Wires & CablesLtd Efficiently Re-investing Its Profits?

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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 27% over the next three years. Regardless, the future ROE for Ningbo Orient Wires & CablesLtd is speculated to rise to 22% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

On the whole, we feel that Ningbo Orient Wires & CablesLtd's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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.

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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.