China Automotive Engineering Research Institute Co., Ltd. (SHSE:601965) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

China Automotive Engineering Research Institute (SHSE:601965) has had a rough three months with its share price down 9.5%. 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. In this article, we decided to focus on China Automotive Engineering Research Institute’s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for China Automotive Engineering Research Institute

How Do You Calculate Return On Equity?

ROE 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 China Automotive Engineering Research Institute is:

13% = CN¥827m ÷ CN¥6.5b (Based on the trailing twelve months to December 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¥0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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 Automotive Engineering Research Institute’s Earnings Growth And 13% ROE

To begin with, China Automotive Engineering Research Institute seems to have a respectable ROE. Especially when compared to the industry average of 7.7% the company’s ROE looks pretty impressive. This certainly adds some context to China Automotive Engineering Research Institute’s decent 14% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that China Automotive Engineering Research Institute’s reported growth was lower than the industry growth of 23% over the last few years, which is not something we like to see.

past-earnings-growth
SHSE:601965 Past Earnings Growth February 28th 2024

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). This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about China Automotive Engineering Research Institute’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is China Automotive Engineering Research Institute Efficiently Re-investing Its Profits?

China Automotive Engineering Research Institute has a healthy combination of a moderate three-year median payout ratio of 42% (or a retention ratio of 58%) 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 Automotive Engineering Research Institute has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 49%. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 15%.

Summary

On the whole, we feel that China Automotive Engineering 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. As a result, the decent growth in its earnings is not surprising. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. 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.

Valuation is complex, but we’re helping make it simple.

Find out whether China Automotive Engineering Research Institute is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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