Is Avary Holding(Shenzhen)Co., Limited's (SZSE:002938) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Avary Holding(Shenzhen)Co's (SZSE:002938) stock increased significantly by 13% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Avary Holding(Shenzhen)Co's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Avary Holding(Shenzhen)Co

How Is ROE Calculated?

Return on equity 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 Avary Holding(Shenzhen)Co is:

11% = CN¥3.4b ÷ CN¥30b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.11 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. 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.

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

To begin with, Avary Holding(Shenzhen)Co seems to have a respectable ROE. On comparing with the average industry ROE of 6.5% the company's ROE looks pretty remarkable. This certainly adds some context to Avary Holding(Shenzhen)Co's decent 6.7% net income growth seen over the past 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 4.0% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Using Its Retained Earnings Effectively?

Avary Holding(Shenzhen)Co has a three-year median payout ratio of 34%, which implies that it retains the remaining 66% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Avary Holding(Shenzhen)Co has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 37%. Regardless, the future ROE for Avary Holding(Shenzhen)Co is predicted to rise to 14% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that Avary Holding(Shenzhen)Co's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.