Shanghai Flyco Electrical Appliance Co., Ltd.'s (SHSE:603868) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Shanghai Flyco Electrical Appliance (SHSE:603868) has had a great run on the share market with its stock up by a significant 24% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Shanghai Flyco Electrical Appliance's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Shanghai Flyco Electrical Appliance

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shanghai Flyco Electrical Appliance is:

22% = CN¥657m ÷ CN¥3.0b (Based on the trailing twelve months to September 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¥0.22 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.

Shanghai Flyco Electrical Appliance's Earnings Growth And 22% ROE

To begin with, Shanghai Flyco Electrical Appliance seems to have a respectable ROE. Especially when compared to the industry average of 9.9% the company's ROE looks pretty impressive. This certainly adds some context to Shanghai Flyco Electrical Appliance's decent 6.4% net income growth seen over the past five years.

We then performed a comparison between Shanghai Flyco Electrical Appliance's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 7.9% 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). Doing so will help them establish if the stock's future looks promising or ominous. Is Shanghai Flyco Electrical Appliance fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai Flyco Electrical Appliance Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 96% (or a retention ratio of 4.3%) for Shanghai Flyco Electrical Appliance suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Shanghai Flyco Electrical Appliance has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like Shanghai Flyco Electrical Appliance has some positive aspects to its business. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.