Changzhou Aohong Electronics Co., Ltd.'s (SHSE:605058) Stock Is Going Strong: Have Financials A Role To Play?

Changzhou Aohong Electronics (SHSE:605058) has had a great run on the share market with its stock up by a significant 10% over the last week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Changzhou Aohong Electronics' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Changzhou Aohong Electronics

How To 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 Changzhou Aohong Electronics is:

8.2% = CN¥136m ÷ CN¥1.7b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.08 in profit.

Why Is ROE Important For 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. 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.

Changzhou Aohong Electronics' Earnings Growth And 8.2% ROE

On the face of it, Changzhou Aohong Electronics' ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 6.4% which we definitely can't overlook. Having said that, Changzhou Aohong Electronics' net income growth over the past five years is more or less flat. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to stay flat.

As a next step, we compared Changzhou Aohong Electronics' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 4.8% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Changzhou Aohong Electronics''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Changzhou Aohong Electronics Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 31% (meaning the company retains69% of profits) in the last three-year period, Changzhou Aohong Electronics' earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Changzhou Aohong Electronics has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we feel that Changzhou Aohong Electronics certainly does have some positive factors to consider. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Changzhou Aohong Electronics' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.