Should Weakness in CIMC Vehicles (Group) Co., Ltd.'s (HKG:1839) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 12% over the past month, it is easy to disregard CIMC Vehicles (Group) (HKG:1839). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study CIMC Vehicles (Group)'s ROE in this article.

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 CIMC Vehicles (Group)

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 CIMC Vehicles (Group) is:

12% = CN¥1.2b ÷ CN¥10b (Based on the trailing twelve months to June 2020).

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$0.12 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.

A Side By Side comparison of CIMC Vehicles (Group)'s Earnings Growth And 12% ROE

To begin with, CIMC Vehicles (Group) seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 10%. Consequently, this likely laid the ground for the decent growth of 11% seen over the past five years by CIMC Vehicles (Group).

We then compared CIMC Vehicles (Group)'s net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 16% in the same period, which is a bit concerning.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if CIMC Vehicles (Group) is trading on a high P/E or a low P/E, relative to its industry.

Is CIMC Vehicles (Group) Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 65% (or a retention ratio of 35%) 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

Overall, we feel that CIMC Vehicles (Group) certainly does have some positive factors to consider. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. 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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