Is The Market Rewarding AVIC Xi'an Aircraft Industry Group Company Ltd. (SZSE:000768) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

With its stock down 3.6% over the past week, it is easy to disregard AVIC Xi'an Aircraft Industry Group (SZSE:000768). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on AVIC Xi'an Aircraft Industry Group's ROE.

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

See our latest analysis for AVIC Xi'an Aircraft Industry Group

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 AVIC Xi'an Aircraft Industry Group is:

4.5% = CN¥898m ÷ CN¥20b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 in profit.

What Is The Relationship Between ROE And 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.

AVIC Xi'an Aircraft Industry Group's Earnings Growth And 4.5% ROE

It is hard to argue that AVIC Xi'an Aircraft Industry Group's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 5.0%. Given the circumstances, the significant decline in net income by 4.7% seen by AVIC Xi'an Aircraft Industry Group over the last five years is not surprising.

That being said, we compared AVIC Xi'an Aircraft Industry Group's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 10% 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about AVIC Xi'an Aircraft Industry Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is AVIC Xi'an Aircraft Industry Group Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 34% (where it is retaining 66% of its profits), AVIC Xi'an Aircraft Industry Group has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, AVIC Xi'an Aircraft Industry Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we have mixed feelings about AVIC Xi'an Aircraft Industry Group. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.