Chengdu Fusen Noble-House IndustrialLtd's (SZSE:002818) stock is up by a considerable 26% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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 Chengdu Fusen Noble-House IndustrialLtd is:

13% = CN¥749m ÷ CN¥5.9b (Based on the trailing twelve months to September 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¥0.13 in profit.

What Has ROE Got To Do With 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. 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 13% ROE

At first glance, Chengdu Fusen Noble-House IndustrialLtd seems to have a decent ROE. Especially when compared to the industry average of 4.3% the company's ROE looks pretty impressive. Given the circumstances, we can't help but wonder why Chengdu Fusen Noble-House IndustrialLtd saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Chengdu Fusen Noble-House IndustrialLtd's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 7.6% in the same 5-year period. This does offer shareholders some relief

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 002818 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Chengdu Fusen Noble-House IndustrialLtd Using Its Retained Earnings Effectively?

Chengdu Fusen Noble-House IndustrialLtd has a very high three-year median payout ratio of 102% over the last last three years, which suggests that the company is dipping into more than just its earnings to pay its dividend. The absence of growth in Chengdu Fusen Noble-House IndustrialLtd's earnings therefore, doesn't come as a surprise. Its usually very hard to sustain dividend payments that are higher than reported profits. That's a huge risk in our books.

In addition, Chengdu Fusen Noble-House IndustrialLtd has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we feel that the performance shown by Chengdu Fusen Noble-House IndustrialLtd can be open to many interpretations. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.