Could The Market Be Wrong About Himile Mechanical Science and Technology (Shandong) Co., Ltd (SZSE:002595) Given Its Attractive Financial Prospects?

With its stock down 6.8% over the past three months, it is easy to disregard Himile Mechanical Science and Technology (Shandong) (SZSE:002595). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Himile Mechanical Science and Technology (Shandong)'s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Himile Mechanical Science and Technology (Shandong)

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Himile Mechanical Science and Technology (Shandong) is:

19% = CN¥1.7b ÷ CN¥9.0b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.19 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Himile Mechanical Science and Technology (Shandong)'s Earnings Growth And 19% ROE

To start with, Himile Mechanical Science and Technology (Shandong)'s ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.9%. Probably as a result of this, Himile Mechanical Science and Technology (Shandong) was able to see a decent growth of 14% over the last five years.

Next, on comparing with the industry net income growth, we found that Himile Mechanical Science and Technology (Shandong)'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 an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Himile Mechanical Science and Technology (Shandong) is trading on a high P/E or a low P/E, relative to its industry.

Is Himile Mechanical Science and Technology (Shandong) Efficiently Re-investing Its Profits?

Himile Mechanical Science and Technology (Shandong) has a healthy combination of a moderate three-year median payout ratio of 28% (or a retention ratio of 72%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Himile Mechanical Science and Technology (Shandong) is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 13% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

Overall, we are quite pleased with Himile Mechanical Science and Technology (Shandong)'s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.

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