Most readers would already be aware that Yutong Heavy IndustriesLtd's (SHSE:600817) stock increased significantly by 11% over the past week. 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 Yutong Heavy IndustriesLtd's ROE today.
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.
How Is ROE Calculated?
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 Yutong Heavy IndustriesLtd is:
8.6% = CN¥226m ÷ CN¥2.6b (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.09 in profit.
Why Is ROE Important For 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 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 Yutong Heavy IndustriesLtd's Earnings Growth And 8.6% ROE
On the face of it, Yutong Heavy IndustriesLtd's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 7.4%, we may spare it some thought. On the other hand, Yutong Heavy IndustriesLtd reported a moderate 15% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.
We then compared Yutong Heavy IndustriesLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Yutong Heavy IndustriesLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Yutong Heavy IndustriesLtd Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 59% (or a retention ratio of 41%) for Yutong Heavy IndustriesLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Along with seeing a growth in earnings, Yutong Heavy IndustriesLtd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.
Summary
Overall, we feel that Yutong Heavy IndustriesLtd certainly does have some positive factors to consider. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.