Declining Stock and Decent Financials: Is The Market Wrong About Chengdu Fusen Noble-House Industrial Co.,Ltd. (SZSE:002818)?

It is hard to get excited after looking at Chengdu Fusen Noble-House IndustrialLtd's (SZSE:002818) recent performance, when its stock has declined 9.6% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Chengdu Fusen Noble-House IndustrialLtd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Chengdu Fusen Noble-House IndustrialLtd

How To 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 Chengdu Fusen Noble-House IndustrialLtd is:

13% = CN¥826m ÷ CN¥6.1b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.13.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Chengdu Fusen Noble-House IndustrialLtd's Earnings Growth And 13% ROE

At first glance, Chengdu Fusen Noble-House IndustrialLtd seems to have a decent ROE. Especially when compared to the industry average of 4.4% the company's ROE looks pretty impressive. Yet, Chengdu Fusen Noble-House IndustrialLtd has posted measly growth of 2.3% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Given that the industry shrunk its earnings at a rate of 2.6% over the last few years, the net income growth of the company is quite impressive.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Chengdu Fusen Noble-House IndustrialLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chengdu Fusen Noble-House IndustrialLtd Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 98% (that is, the company retains only 2.4% of its income) over the past three years for Chengdu Fusen Noble-House IndustrialLtd suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Chengdu Fusen Noble-House IndustrialLtd has paid dividends over a period of seven years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we feel that Chengdu Fusen Noble-House IndustrialLtd certainly does have some positive factors to consider. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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