It is hard to get excited after looking at Neway Valve (Suzhou)'s (SHSE:603699) recent performance, when its stock has declined 7.0% over the past month. 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. Specifically, we decided to study Neway Valve (Suzhou)'s ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Neway Valve (Suzhou)
How Do You 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 Neway Valve (Suzhou) is:
20% = CN¥716m ÷ CN¥3.7b (Based on the trailing twelve months to September 2023).
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¥0.20 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.
Neway Valve (Suzhou)'s Earnings Growth And 20% ROE
To start with, Neway Valve (Suzhou)'s ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 7.5%. This probably laid the ground for Neway Valve (Suzhou)'s moderate 9.6% net income growth seen over the past five years.
We then performed a comparison between Neway Valve (Suzhou)'s net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 11% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 Neway Valve (Suzhou) is trading on a high P/E or a low P/E, relative to its industry.
Is Neway Valve (Suzhou) Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 55% (or a retention ratio of 45%) for Neway Valve (Suzhou) suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Neway Valve (Suzhou) has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.
Summary
Overall, we are quite pleased with Neway Valve (Suzhou)'s performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.