Changzhou Tenglong AutoPartsCo.Ltd (SHSE:603158) has had a rough three months with its share price down 32%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Changzhou Tenglong AutoPartsCo.Ltd's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Changzhou Tenglong AutoPartsCo.Ltd

How To 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 Changzhou Tenglong AutoPartsCo.Ltd is:

4.2% = CN¥91m ÷ CN¥2.2b (Based on the trailing twelve months to March 2022).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 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. 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 Changzhou Tenglong AutoPartsCo.Ltd's Earnings Growth And 4.2% ROE

It is quite clear that Changzhou Tenglong AutoPartsCo.Ltd's ROE is rather low. Even when compared to the industry average of 6.7%, the ROE figure is pretty disappointing. As a result, Changzhou Tenglong AutoPartsCo.Ltd's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

We then performed a comparison between Changzhou Tenglong AutoPartsCo.Ltd's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 1.4% in the same period.

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. Is Changzhou Tenglong AutoPartsCo.Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Changzhou Tenglong AutoPartsCo.Ltd Efficiently Re-investing Its Profits?

Changzhou Tenglong AutoPartsCo.Ltd's low three-year median payout ratio of 21%, (meaning the company retains79% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Additionally, Changzhou Tenglong AutoPartsCo.Ltd has paid dividends over a period of six years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, it does look like Changzhou Tenglong AutoPartsCo.Ltd has some positive aspects to its business. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. Up till now, we've only made a short study of the company's growth data. You can do your own research on Changzhou Tenglong AutoPartsCo.Ltd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.