Could The Market Be Wrong About China National Electric Apparatus Research Institute Co., Ltd. (SHSE:688128) Given Its Attractive Financial Prospects?

Simply Wall St · Oct 19, 2023 00:06

With its stock down 18% over the past three months, it is easy to disregard China National Electric Apparatus Research Institute (SHSE:688128). However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on China National Electric Apparatus Research Institute's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for China National Electric Apparatus Research Institute

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 China National Electric Apparatus Research Institute is:

14% = CN¥377m ÷ CN¥2.7b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

China National Electric Apparatus Research Institute's Earnings Growth And 14% ROE

To begin with, China National Electric Apparatus Research Institute seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.6%. Probably as a result of this, China National Electric Apparatus Research Institute was able to see a decent growth of 12% over the last five years.

Next, on comparing China National Electric Apparatus Research Institute's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.

past-earnings-growth — SHSE:688128 Past Earnings Growth October 19th 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. 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 China National Electric Apparatus Research Institute is trading on a high P/E or a low P/E, relative to its industry.

Is China National Electric Apparatus Research Institute Making Efficient Use Of Its Profits?

China National Electric Apparatus Research Institute has a healthy combination of a moderate three-year median payout ratio of 43% (or a retention ratio of 57%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, China National Electric Apparatus Research Institute has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 40%. Accordingly, forecasts suggest that China National Electric Apparatus Research Institute's future ROE will be 16% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that China National Electric Apparatus Research Institute's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.