Are Robust Financials Driving The Recent Rally In Wuxi Autowell Technology Co.,Ltd.'s (SHSE:688516) Stock?

Most readers would already be aware that Wuxi Autowell TechnologyLtd's (SHSE:688516) stock increased significantly by 35% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Wuxi Autowell TechnologyLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Wuxi Autowell TechnologyLtd

How Do You Calculate Return On Equity?

ROE 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 Wuxi Autowell TechnologyLtd is:

35% = CN¥1.6b ÷ CN¥4.6b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.35 in profit.

What Is The Relationship Between ROE And 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.

Wuxi Autowell TechnologyLtd's Earnings Growth And 35% ROE

Firstly, we acknowledge that Wuxi Autowell TechnologyLtd has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 6.4% also doesn't go unnoticed by us. So, the substantial 53% net income growth seen by Wuxi Autowell TechnologyLtd over the past five years isn't overly surprising.

We then compared Wuxi Autowell TechnologyLtd'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 14% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Wuxi Autowell TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wuxi Autowell TechnologyLtd Efficiently Re-investing Its Profits?

Wuxi Autowell TechnologyLtd's three-year median payout ratio is a pretty moderate 33%, meaning the company retains 67% of its income. By the looks of it, the dividend is well covered and Wuxi Autowell TechnologyLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Wuxi Autowell TechnologyLtd has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 37%. Regardless, Wuxi Autowell TechnologyLtd's ROE is speculated to decline to 26% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that Wuxi Autowell TechnologyLtd's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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. 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.