With its stock down 21% over the past three months, it is easy to disregard Neway CNC Equipment (Suzhou) (SHSE:688697). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Neway CNC Equipment (Suzhou)'s ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Neway CNC Equipment (Suzhou)
How To Calculate Return On Equity?
Return on equity 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 Neway CNC Equipment (Suzhou) is:
20% = CN¥309m ÷ CN¥1.5b (Based on the trailing twelve months to September 2023).
The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.20 in profit.
Why Is ROE Important For 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.
A Side By Side comparison of Neway CNC Equipment (Suzhou)'s Earnings Growth And 20% ROE
At first glance, Neway CNC Equipment (Suzhou) seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.5%. Probably as a result of this, Neway CNC Equipment (Suzhou) was able to see an impressive net income growth of 34% over the last five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Neway CNC Equipment (Suzhou)'s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 CNC Equipment (Suzhou) is trading on a high P/E or a low P/E, relative to its industry.
Is Neway CNC Equipment (Suzhou) Using Its Retained Earnings Effectively?
Neway CNC Equipment (Suzhou) has a three-year median payout ratio of 41% (where it is retaining 59% of its income) which is not too low or not too high. So it seems that Neway CNC Equipment (Suzhou) is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
While Neway CNC Equipment (Suzhou) has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 42% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 21%.
Conclusion
On the whole, we feel that Neway CNC Equipment (Suzhou)'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, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.