Avary Holding(Shenzhen)Co., Limited's (SZSE:002938) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 2.2% over the past three months, it is easy to disregard Avary Holding(Shenzhen)Co (SZSE:002938). 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 Avary Holding(Shenzhen)Co's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Avary Holding(Shenzhen)Co

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Avary Holding(Shenzhen)Co is:

11% = CN¥3.3b ÷ CN¥29b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Avary Holding(Shenzhen)Co's Earnings Growth And 11% ROE

To start with, Avary Holding(Shenzhen)Co's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.4%. Probably as a result of this, Avary Holding(Shenzhen)Co was able to see a decent growth of 7.6% over the last five years.

Next, on comparing with the industry net income growth, we found that Avary Holding(Shenzhen)Co's growth is quite high when compared to the industry average growth of 5.0% in the same period, which is great to see.

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. What is 002938 worth today? The intrinsic value infographic in our free research report helps visualize whether 002938 is currently mispriced by the market.

Is Avary Holding(Shenzhen)Co Making Efficient Use Of Its Profits?

Avary Holding(Shenzhen)Co has a healthy combination of a moderate three-year median payout ratio of 35% (or a retention ratio of 65%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Avary Holding(Shenzhen)Co is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 39% of its profits over the next three years. As a result, Avary Holding(Shenzhen)Co's ROE is not expected to change by much either, which we inferred from the analyst estimate of 13% for future ROE.

Conclusion

Overall, we are quite pleased with Avary Holding(Shenzhen)Co's performance. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.