Dalian Huarui Heavy Industry Group Co., LTD.'s (SZSE:002204) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Dalian Huarui Heavy Industry Group (SZSE:002204) has had a rough three months with its share price down 13%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Dalian Huarui Heavy Industry Group's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Dalian Huarui Heavy Industry Group

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Dalian Huarui Heavy Industry Group is:

5.5% = CN¥392m ÷ CN¥7.1b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Dalian Huarui Heavy Industry Group's Earnings Growth And 5.5% ROE

On the face of it, Dalian Huarui Heavy Industry Group's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.8%, we may spare it some thought. Particularly, the exceptional 40% net income growth seen by Dalian Huarui Heavy Industry Group over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Dalian Huarui Heavy Industry Group's growth is quite high when compared to the industry average growth of 9.5% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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 Dalian Huarui Heavy Industry Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Dalian Huarui Heavy Industry Group Efficiently Re-investing Its Profits?

Dalian Huarui Heavy Industry Group has a really low three-year median payout ratio of 22%, meaning that it has the remaining 78% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Additionally, Dalian Huarui Heavy Industry Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we do feel that Dalian Huarui Heavy Industry Group has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com