Chongqing Chuanyi Automation Co., Ltd.'s (SHSE:603100) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 4.7% over the past week, it is easy to disregard Chongqing Chuanyi Automation (SHSE:603100). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Chongqing Chuanyi Automation's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How To 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 Chongqing Chuanyi Automation is:

18% = CN¥769m ÷ CN¥4.3b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.18 in profit.

Check out our latest analysis for Chongqing Chuanyi Automation

What Has ROE Got To Do With 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.

A Side By Side comparison of Chongqing Chuanyi Automation's Earnings Growth And 18% ROE

At first glance, Chongqing Chuanyi Automation seems to have a decent ROE. Especially when compared to the industry average of 6.0% the company's ROE looks pretty impressive. This probably laid the ground for Chongqing Chuanyi Automation's significant 21% net income growth seen over the past five years. We believe that there might also be 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 Chongqing Chuanyi Automation's growth is quite high when compared to the industry average growth of 3.9% in the same period, which is great to see.

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 Chongqing Chuanyi Automation's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chongqing Chuanyi Automation Using Its Retained Earnings Effectively?

Chongqing Chuanyi Automation has a three-year median payout ratio of 39% (where it is retaining 61% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Chongqing Chuanyi Automation is reinvesting its earnings efficiently.

Besides, Chongqing Chuanyi Automation has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Chongqing Chuanyi Automation's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.