Do Its Financials Have Any Role To Play In Driving Harbin Electric Corporation Jiamusi Electric Machine CO.,Ltd's (SZSE:000922) Stock Up Recently?

Harbin Electric Corporation Jiamusi Electric MachineLtd (SZSE:000922) has had a great run on the share market with its stock up by a significant 41% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Harbin Electric Corporation Jiamusi Electric MachineLtd's ROE today.

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.

View our latest analysis for Harbin Electric Corporation Jiamusi Electric MachineLtd

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Harbin Electric Corporation Jiamusi Electric MachineLtd is:

12% = CN¥438m ÷ CN¥3.6b (Based on the trailing twelve months to March 2024).

The 'return' is the profit 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¥0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Harbin Electric Corporation Jiamusi Electric MachineLtd's Earnings Growth And 12% ROE

To begin with, Harbin Electric Corporation Jiamusi Electric MachineLtd seems to have a respectable ROE. Especially when compared to the industry average of 6.9% the company's ROE looks pretty impressive. Yet, Harbin Electric Corporation Jiamusi Electric MachineLtd has posted measly growth of 3.1% over the past five years. That's a bit unexpected from a company which has such a high rate of return. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Harbin Electric Corporation Jiamusi Electric MachineLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same 5-year period, which is a bit concerning.

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. Has the market priced in the future outlook for 000922? You can find out in our latest intrinsic value infographic research report.

Is Harbin Electric Corporation Jiamusi Electric MachineLtd Efficiently Re-investing Its Profits?

A low three-year median payout ratio of 22% (implying that the company retains the remaining 78% of its income) suggests that Harbin Electric Corporation Jiamusi Electric MachineLtd is retaining most of its profits. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Harbin Electric Corporation Jiamusi Electric MachineLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, we do feel that Harbin Electric Corporation Jiamusi Electric MachineLtd has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.