CIMC Vehicles (Group) Co., Ltd.'s (HKG:1839) Stock Been Rising: Are Strong Financials Guiding The Market?

CIMC Vehicles (Group)'s (HKG:1839) stock up by 3.9% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study CIMC Vehicles (Group)'s ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for CIMC Vehicles (Group)

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 CIMC Vehicles (Group) is:

18% = CN¥2.7b ÷ CN¥15b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each HK$1 of shareholders' capital it has, the company made HK$0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

CIMC Vehicles (Group)'s Earnings Growth And 18% ROE

To begin with, CIMC Vehicles (Group) seems to have a respectable ROE. On comparing with the average industry ROE of 7.3% the company's ROE looks pretty remarkable. Probably as a result of this, CIMC Vehicles (Group) was able to see a decent growth of 11% over the last five years.

As a next step, we compared CIMC Vehicles (Group)'s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.7%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is 1839 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is CIMC Vehicles (Group) Using Its Retained Earnings Effectively?

CIMC Vehicles (Group) has a three-year median payout ratio of 47%, which implies that it retains the remaining 53% 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, CIMC Vehicles (Group) has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we feel that CIMC Vehicles (Group)'s performance has been quite good. 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, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.