Suzhou Alton Electrical & Mechanical Industry Co., Ltd.'s (SZSE:301187) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 14% over the past month, it is easy to disregard Suzhou Alton Electrical & Mechanical Industry (SZSE:301187). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Suzhou Alton Electrical & Mechanical Industry's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Suzhou Alton Electrical & Mechanical Industry is:

16% = CN¥235m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. 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.

See our latest analysis for Suzhou Alton Electrical & Mechanical Industry

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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 16% ROE

To start with, Suzhou Alton Electrical & Mechanical Industry's ROE looks acceptable. Especially when compared to the industry average of 9.8% the company's ROE looks pretty impressive. Probably as a result of this, Suzhou Alton Electrical & Mechanical Industry was able to see a decent growth of 17% over the last five years.

We then compared Suzhou Alton Electrical & Mechanical Industry'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.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 301187? You can find out in our latest intrinsic value infographic research report.

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

While Suzhou Alton Electrical & Mechanical Industry has a three-year median payout ratio of 79% (which means it retains 21% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Suzhou Alton Electrical & Mechanical Industry has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 75% of its profits over the next three years. Still, forecasts suggest that Suzhou Alton Electrical & Mechanical Industry's future ROE will rise to 21% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we are pretty happy with Suzhou Alton Electrical & Mechanical Industry's performance. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.