AVIC (Chengdu)UAS (SHSE:688297) has had a rough three months with its share price down 14%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study AVIC (Chengdu)UAS' ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Is ROE Calculated?

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 AVIC (Chengdu)UAS is:

3.6% = CN¥211m ÷ CN¥5.8b (Based on the trailing twelve months to March 2024).

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¥0.04 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. 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. 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.

AVIC (Chengdu)UAS' Earnings Growth And 3.6% ROE

It is quite clear that AVIC (Chengdu)UAS' ROE is rather low. Even when compared to the industry average of 5.0%, the ROE figure is pretty disappointing. Despite this, surprisingly, AVIC (Chengdu)UAS saw an exceptional 21% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that AVIC (Chengdu)UAS' growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is AVIC (Chengdu)UAS fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is AVIC (Chengdu)UAS Making Efficient Use Of Its Profits?

AVIC (Chengdu)UAS' significant three-year median payout ratio of 63% (where it is retaining only 37% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Along with seeing a growth in earnings, AVIC (Chengdu)UAS only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 28% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 8.0%, over the same period.

Conclusion

On the whole, we do feel that AVIC (Chengdu)UAS has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.