Hunan Valin Wire & Cable Co.,Ltd. (SZSE:001208) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Hunan Valin Wire & CableLtd (SZSE:001208) has had a great run on the share market with its stock up by a significant 20% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Hunan Valin Wire & CableLtd's ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Hunan Valin Wire & CableLtd

How Is ROE Calculated?

Return on equity 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 Hunan Valin Wire & CableLtd is:

6.9% = CN¥109m ÷ CN¥1.6b (Based on the trailing twelve months to June 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¥0.07.

Why Is ROE Important For 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.

Hunan Valin Wire & CableLtd's Earnings Growth And 6.9% ROE

At first glance, Hunan Valin Wire & CableLtd's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.9%, we may spare it some thought. Having said that, Hunan Valin Wire & CableLtd's five year net income decline rate was 3.3%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

That being said, we compared Hunan Valin Wire & CableLtd'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 12% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Hunan Valin Wire & CableLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hunan Valin Wire & CableLtd Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 28% (where it is retaining 72% of its profits), Hunan Valin Wire & CableLtd has seen a decline in earnings as we saw above. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Hunan Valin Wire & CableLtd has paid dividends over a period of three years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Conclusion

Overall, we have mixed feelings about Hunan Valin Wire & CableLtd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 1 risk we have identified for Hunan Valin Wire & CableLtd visit our risks dashboard for free.

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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.