Are China Machinery Huanyu Certification and Inspection Co., LTD's (SZSE:301508) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

It is hard to get excited after looking at China Machinery Huanyu Certification and Inspection's (SZSE:301508) recent performance, when its stock has declined 19% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on China Machinery Huanyu Certification and Inspection's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for China Machinery Huanyu Certification and Inspection

How Do You Calculate Return On Equity?

ROE 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 China Machinery Huanyu Certification and Inspection is:

7.6% = CN¥152m ÷ CN¥2.0b (Based on the trailing twelve months to March 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¥0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

China Machinery Huanyu Certification and Inspection's Earnings Growth And 7.6% ROE

On the face of it, China Machinery Huanyu Certification and Inspection's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.2%, is definitely interesting. This certainly adds some context to China Machinery Huanyu Certification and Inspection's moderate 17% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing with the industry net income growth, we found that the growth figure reported by China Machinery Huanyu Certification and Inspection compares quite favourably to the industry average, which shows a decline of 0.07% over the last few years.

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. Is China Machinery Huanyu Certification and Inspection fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is China Machinery Huanyu Certification and Inspection Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 53% (or a retention ratio of 47%) for China Machinery Huanyu Certification and Inspection suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Summary

Overall, we feel that China Machinery Huanyu Certification and Inspection certainly does have some positive factors to consider. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into China Machinery Huanyu Certification and Inspection's past profit growth, check out this visualization 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.