Do Its Financials Have Any Role To Play In Driving Ningbo Henghe Precision Industry Co.,Ltd.'s (SZSE:300539) Stock Up Recently?

Ningbo Henghe Precision IndustryLtd's (SZSE:300539) stock is up by a considerable 62% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Ningbo Henghe Precision IndustryLtd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Ningbo Henghe Precision IndustryLtd

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 Ningbo Henghe Precision IndustryLtd is:

5.1% = CN¥28m ÷ CN¥547m (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Ningbo Henghe Precision IndustryLtd's Earnings Growth And 5.1% ROE

At first glance, Ningbo Henghe Precision IndustryLtd's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.3%, we may spare it some thought. Particularly, the exceptional 28% net income growth seen by Ningbo Henghe Precision IndustryLtd over the past five years is pretty remarkable. 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.

We then compared Ningbo Henghe Precision IndustryLtd'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 4.9% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Ningbo Henghe Precision IndustryLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Ningbo Henghe Precision IndustryLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 61% (implying that it keeps only 39% of profits) for Ningbo Henghe Precision IndustryLtd suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Ningbo Henghe Precision IndustryLtd is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.

Conclusion

Overall, we feel that Ningbo Henghe Precision IndustryLtd certainly does have some positive factors to consider. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Ningbo Henghe Precision IndustryLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.