Do Its Financials Have Any Role To Play In Driving Sichuan Changhong Electric Co.,Ltd.'s (SHSE:600839) Stock Up Recently?

Sichuan Changhong ElectricLtd (SHSE:600839) has had a great run on the share market with its stock up by a significant 39% over the last three months. 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. Particularly, we will be paying attention to Sichuan Changhong ElectricLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Sichuan Changhong ElectricLtd

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 Sichuan Changhong ElectricLtd is:

7.0% = CN¥1.7b ÷ CN¥24b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.

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. 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 Sichuan Changhong ElectricLtd's Earnings Growth And 7.0% ROE

At first glance, Sichuan Changhong ElectricLtd's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 9.9% either. Despite this, surprisingly, Sichuan Changhong ElectricLtd saw an exceptional 44% net income growth over the past five years. So, there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Sichuan Changhong ElectricLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 8.8% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Sichuan Changhong ElectricLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Sichuan Changhong ElectricLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Sichuan Changhong ElectricLtd is 30%, which is moderately low. The company is retaining the remaining 70%. By the looks of it, the dividend is well covered and Sichuan Changhong ElectricLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Sichuan Changhong ElectricLtd 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.

Conclusion

In total, it does look like Sichuan Changhong ElectricLtd has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Sichuan Changhong ElectricLtd by visiting our risks dashboard for free on our platform here.

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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.