Are Shaanxi Huaqin Technology Industry Co.,Ltd.'s (SHSE:688281) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Shaanxi Huaqin Technology IndustryLtd (SHSE:688281) has had a rough month with its share price down 6.7%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Shaanxi Huaqin Technology IndustryLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Shaanxi Huaqin Technology IndustryLtd

How Do You 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 Shaanxi Huaqin Technology IndustryLtd is:

6.4% = CN¥281m ÷ CN¥4.4b (Based on the trailing twelve months to March 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¥0.06 in profit.

Why Is ROE Important For 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 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.

Shaanxi Huaqin Technology IndustryLtd's Earnings Growth And 6.4% ROE

On the face of it, Shaanxi Huaqin Technology IndustryLtd's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.4%, we may spare it some thought. Moreover, we are quite pleased to see that Shaanxi Huaqin Technology IndustryLtd's net income grew significantly at a rate of 35% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Shaanxi Huaqin Technology IndustryLtd's growth is quite high when compared to the industry average growth of 7.8% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shaanxi Huaqin Technology IndustryLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shaanxi Huaqin Technology IndustryLtd Efficiently Re-investing Its Profits?

Shaanxi Huaqin Technology IndustryLtd's ' three-year median payout ratio is on the lower side at 7.7% implying that it is retaining a higher percentage (92%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Along with seeing a growth in earnings, Shaanxi Huaqin Technology IndustryLtd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 7.2% of its profits over the next three years. Still, forecasts suggest that Shaanxi Huaqin Technology IndustryLtd's future ROE will rise to 14% even though the the company's payout ratio is not expected to change by much.

Summary

In total, it does look like Shaanxi Huaqin Technology IndustryLtd has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.

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