MotoMotion China Corporation's (SZSE:301061) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

MotoMotion China's (SZSE:301061) stock is up by a considerable 39% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to MotoMotion China's ROE today.

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 MotoMotion China

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 MotoMotion China is:

16% = CN¥516m ÷ CN¥3.3b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings 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¥0.16 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

MotoMotion China's Earnings Growth And 16% ROE

To begin with, MotoMotion China seems to have a respectable ROE. Especially when compared to the industry average of 9.7% the company's ROE looks pretty impressive. This probably laid the ground for MotoMotion China's significant 22% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared MotoMotion China'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 7.8% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about MotoMotion China's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is MotoMotion China Efficiently Re-investing Its Profits?

The three-year median payout ratio for MotoMotion China is 32%, which is moderately low. The company is retaining the remaining 68%. By the looks of it, the dividend is well covered and MotoMotion China is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, MotoMotion China is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 32%. As a result, MotoMotion China's ROE is not expected to change by much either, which we inferred from the analyst estimate of 18% for future ROE.

Conclusion

On the whole, we feel that MotoMotion China's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.