China Machinery Huanyu Certification and Inspection Co., LTD's (SZSE:301508) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

China Machinery Huanyu Certification and Inspection (SZSE:301508) has had a great run on the share market with its stock up by a significant 10% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on China Machinery Huanyu Certification and Inspection's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for China Machinery Huanyu Certification and Inspection

How Is ROE Calculated?

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 China Machinery Huanyu Certification and Inspection is:

6.3% = CN¥132m ÷ CN¥2.1b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. 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?

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

China Machinery Huanyu Certification and Inspection's Earnings Growth And 6.3% ROE

On the face of it, China Machinery Huanyu Certification and Inspection'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, China Machinery Huanyu Certification and Inspection has shown a modest net income growth of 13% over the past five years. 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. 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.

Next, on comparing with the industry net income growth, we found that China Machinery Huanyu Certification and Inspection's growth is quite high when compared to the industry average growth of 3.5% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 59% (or a retention ratio of 41%) 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.

While China Machinery Huanyu Certification and Inspection has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

Overall, we feel that China Machinery Huanyu Certification and Inspection certainly does have some positive factors to consider. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. 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.