Is Suzhou Alton Electrical & Mechanical Industry Co., Ltd.'s (SZSE:301187) Latest Stock Performance A Reflection Of Its Financial Health?

Suzhou Alton Electrical & Mechanical Industry's (SZSE:301187) stock is up by a considerable 21% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Suzhou Alton Electrical & Mechanical Industry's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Suzhou Alton Electrical & Mechanical Industry

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 Suzhou Alton Electrical & Mechanical Industry is:

13% = CN¥199m ÷ CN¥1.5b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.13 in profit.

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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Suzhou Alton Electrical & Mechanical Industry's Earnings Growth And 13% ROE

To begin with, Suzhou Alton Electrical & Mechanical Industry seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.8%. This certainly adds some context to Suzhou Alton Electrical & Mechanical Industry's decent 15% net income growth seen over the past five years.

As a next step, we compared Suzhou Alton Electrical & Mechanical Industry's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.1%.

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. Is Suzhou Alton Electrical & Mechanical Industry fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Suzhou Alton Electrical & Mechanical Industry Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 72% (or a retention ratio of 28%) for Suzhou Alton Electrical & Mechanical Industry suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Along with seeing a growth in earnings, Suzhou Alton Electrical & Mechanical Industry only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

On the whole, we feel that Suzhou Alton Electrical & Mechanical Industry's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com