Harbin Electric Corporation Jiamusi Electric Machine CO.,Ltd's (SZSE:000922) Stock Is Going Strong: Have Financials A Role To Play?

Harbin Electric Corporation Jiamusi Electric MachineLtd's (SZSE:000922) stock is up by a considerable 30% over the past 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Harbin Electric Corporation Jiamusi Electric MachineLtd

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 Harbin Electric Corporation Jiamusi Electric MachineLtd is:

9.9% = CN¥357m ÷ CN¥3.6b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.10.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Harbin Electric Corporation Jiamusi Electric MachineLtd's Earnings Growth And 9.9% ROE

On the face of it, Harbin Electric Corporation Jiamusi Electric MachineLtd's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 6.4% which we definitely can't overlook. Yet, Harbin Electric Corporation Jiamusi Electric MachineLtd has posted measly growth of 2.2% over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay low.

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 10% in the same 5-year period, which is a bit concerning.

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 Harbin Electric Corporation Jiamusi Electric MachineLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Harbin Electric Corporation Jiamusi Electric MachineLtd Using Its Retained Earnings Effectively?

Harbin Electric Corporation Jiamusi Electric MachineLtd has a low three-year median payout ratio of 22% (meaning, the company keeps the remaining 78% of profits) which means that the company is retaining more of its earnings. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Harbin Electric Corporation Jiamusi Electric MachineLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

Overall, we feel that Harbin Electric Corporation Jiamusi Electric MachineLtd certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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.