Hunan Yujing Machinery Co.,Ltd's (SZSE:002943) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Hunan Yujing MachineryLtd's (SZSE:002943) stock is up by a considerable 13% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Hunan Yujing MachineryLtd'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.

Check out our latest analysis for Hunan Yujing MachineryLtd

How Do You Calculate Return On Equity?

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 Yujing MachineryLtd is:

3.2% = CN¥43m ÷ CN¥1.3b (Based on the trailing twelve months to September 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¥0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Hunan Yujing MachineryLtd's Earnings Growth And 3.2% ROE

It is hard to argue that Hunan Yujing MachineryLtd's ROE is much good in and of itself. Even when compared to the industry average of 6.3%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Hunan Yujing MachineryLtd grew its net income at a significant rate of 53% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Hunan Yujing MachineryLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.1%.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hunan Yujing MachineryLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hunan Yujing MachineryLtd Efficiently Re-investing Its Profits?

Hunan Yujing MachineryLtd has a significant three-year median payout ratio of 61%, meaning the company only retains 39% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Moreover, Hunan Yujing MachineryLtd is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Summary

Overall, we feel that Hunan Yujing MachineryLtd certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Up till now, we've only made a short study of the company's growth data. You can do your own research on Hunan Yujing MachineryLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.