Do Its Financials Have Any Role To Play In Driving AVIC (Chengdu) UAS Co., Ltd.'s (SHSE:688297) Stock Up Recently?

Simply Wall St · Mar 13, 2023 10:23

AVIC (Chengdu) UAS' (SHSE:688297) stock is up by a considerable 5.2% over the past week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study AVIC (Chengdu) UAS' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for AVIC (Chengdu) UAS

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for AVIC (Chengdu) UAS is:

6.4% = CN¥364m ÷ CN¥5.7b (Based on the trailing twelve months to December 2022).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

AVIC (Chengdu) UAS' Earnings Growth And 6.4% ROE

On the face of it, AVIC (Chengdu) UAS' ROE is not much to talk about. However, its ROE is similar to the industry average of 5.6%, so we won't completely dismiss the company. Particularly, the exceptional 46% net income growth seen by AVIC (Chengdu) UAS over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that AVIC (Chengdu) UAS' growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.

past-earnings-growth — SHSE:688297 Past Earnings Growth March 13th 2023

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about AVIC (Chengdu) UAS''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is AVIC (Chengdu) UAS Using Its Retained Earnings Effectively?

AVIC (Chengdu) UAS doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

Overall, we feel that AVIC (Chengdu) UAS certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.

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