CIMC Vehicles (Group) Co., Ltd.'s (HKG:1839) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

CIMC Vehicles (Group)'s (HKG:1839) stock is up by a considerable 7.3% over the past month. 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. Particularly, we will be paying attention to CIMC Vehicles (Group)'s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for CIMC Vehicles (Group)

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 CIMC Vehicles (Group) is:

12% = CN¥1.3b ÷ CN¥11b (Based on the trailing twelve months to June 2021).

The 'return' refers to a company's earnings over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.12 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. 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.

CIMC Vehicles (Group)'s Earnings Growth And 12% ROE

To begin with, CIMC Vehicles (Group) seems to have a respectable ROE. On comparing with the average industry ROE of 9.5% the company's ROE looks pretty remarkable. This probably laid the ground for CIMC Vehicles (Group)'s moderate 6.4% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that CIMC Vehicles (Group)'s reported growth was lower than the industry growth of 13% in the same period, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 1839? You can find out in our latest intrinsic value infographic research report

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

The high three-year median payout ratio of 71% (or a retention ratio of 29%) for CIMC Vehicles (Group) suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

While CIMC Vehicles (Group) has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we do feel that CIMC Vehicles (Group) has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. 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 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.
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