Chengdu Fusen Noble-House IndustrialLtd's (SZSE:002818) stock is up by a considerable 8.6% over the past month. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Chengdu Fusen Noble-House IndustrialLtd'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Chengdu Fusen Noble-House IndustrialLtd is:

14% = CN¥815m ÷ CN¥6.0b (Based on the trailing twelve months to September 2023).

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¥0.14 in profit.

What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Chengdu Fusen Noble-House IndustrialLtd's Earnings Growth And 14% ROE

To start with, Chengdu Fusen Noble-House IndustrialLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 4.6%. However, for some reason, the higher returns aren't reflected in Chengdu Fusen Noble-House IndustrialLtd's meagre five year net income growth average of 3.0%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Chengdu Fusen Noble-House IndustrialLtd'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 0.9% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 002818? You can find out in our latest intrinsic value infographic research report

Is Chengdu Fusen Noble-House IndustrialLtd Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 66% (or a retention ratio of 34%), most of Chengdu Fusen Noble-House IndustrialLtd's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Chengdu Fusen Noble-House IndustrialLtd has paid dividends over a period of seven years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we are pretty happy with Chengdu Fusen Noble-House IndustrialLtd's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. 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 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.