Yonyou Auto Information Technology (Shanghai) Co.,Ltd (SHSE:688479) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

It is hard to get excited after looking at Yonyou Auto Information Technology (Shanghai)Ltd's (SHSE:688479) recent performance, when its stock has declined 16% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Yonyou Auto Information Technology (Shanghai)Ltd'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.

See our latest analysis for Yonyou Auto Information Technology (Shanghai)Ltd

How Is ROE Calculated?

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 Yonyou Auto Information Technology (Shanghai)Ltd is:

4.3% = CN¥82m ÷ CN¥1.9b (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¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Yonyou Auto Information Technology (Shanghai)Ltd's Earnings Growth And 4.3% ROE

It is quite clear that Yonyou Auto Information Technology (Shanghai)Ltd's ROE is rather low. An industry comparison shows that the company's ROE is not much different from the industry average of 4.5% either. Therefore, the low net income growth of 2.3% seen by Yonyou Auto Information Technology (Shanghai)Ltd over the past five years could probably be the result of it having a lower ROE.

We then compared Yonyou Auto Information Technology (Shanghai)Ltd'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 1.1% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Yonyou Auto Information Technology (Shanghai)Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Yonyou Auto Information Technology (Shanghai)Ltd Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 62% (or a retention ratio of 38%), most of Yonyou Auto Information Technology (Shanghai)Ltd's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Only recently, Yonyou Auto Information Technology (Shanghai)Ltd started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we do feel that Yonyou Auto Information Technology (Shanghai)Ltd has some positive attributes. 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. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Yonyou Auto Information Technology (Shanghai)Ltd by visiting our risks dashboard for free on our platform here.

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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.