Has CATARC Automotive Proving Ground Co.,Ltd.'s (SZSE:301215) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

CATARC Automotive Proving GroundLtd (SZSE:301215) has had a great run on the share market with its stock up by a significant 22% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on CATARC Automotive Proving GroundLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for CATARC Automotive Proving GroundLtd

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 CATARC Automotive Proving GroundLtd is:

5.4% = CN¥153m ÷ CN¥2.8b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of CATARC Automotive Proving GroundLtd's Earnings Growth And 5.4% ROE

On the face of it, CATARC Automotive Proving GroundLtd's ROE is not much to talk about. However, its ROE is similar to the industry average of 6.6%, so we won't completely dismiss the company. Having said that, CATARC Automotive Proving GroundLtd has shown a modest net income growth of 9.6% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that CATARC Automotive Proving GroundLtd's growth is quite high when compared to the industry average growth of 3.5% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 CATARC Automotive Proving GroundLtd is trading on a high P/E or a low P/E, relative to its industry.

Is CATARC Automotive Proving GroundLtd Using Its Retained Earnings Effectively?

CATARC Automotive Proving GroundLtd has a three-year median payout ratio of 48%, which implies that it retains the remaining 52% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

While CATARC Automotive Proving GroundLtd has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we do feel that CATARC Automotive Proving GroundLtd 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.