It is hard to get excited after looking at Ecovacs Robotics' (SHSE:603486) recent performance, when its stock has declined 7.9% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Ecovacs Robotics' 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.
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 Ecovacs Robotics is:
18% = CN¥1.2b ÷ CN¥6.7b (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.18 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. 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 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.
A Side By Side comparison of Ecovacs Robotics' Earnings Growth And 18% ROE
To start with, Ecovacs Robotics' ROE looks acceptable. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. This probably laid the ground for Ecovacs Robotics' significant 36% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that Ecovacs Robotics' growth is quite high when compared to the industry average growth of 8.0% 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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 603486? You can find out in our latest intrinsic value infographic research report.
Is Ecovacs Robotics Using Its Retained Earnings Effectively?
The three-year median payout ratio for Ecovacs Robotics is 30%, which is moderately low. The company is retaining the remaining 70%. By the looks of it, the dividend is well covered and Ecovacs Robotics is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Moreover, Ecovacs Robotics is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. 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 35%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 19%.
Conclusion
In total, we are pretty happy with Ecovacs Robotics' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.