Most readers would already be aware that Anhui Zhongding Sealing Parts' (SZSE:000887) stock increased significantly by 15% over the past three months. 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. In this article, we decided to focus on Anhui Zhongding Sealing Parts' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Is ROE Calculated?

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 Anhui Zhongding Sealing Parts is:

10% = CN¥1.3b ÷ CN¥13b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.10 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. 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 Anhui Zhongding Sealing Parts' Earnings Growth And 10% ROE

When you first look at it, Anhui Zhongding Sealing Parts' ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 8.3% doesn't go unnoticed by us. Especially when you consider Anhui Zhongding Sealing Parts' exceptional 20% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Anhui Zhongding Sealing Parts' growth is quite high when compared to the industry average growth of 9.2% 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Anhui Zhongding Sealing Parts''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Anhui Zhongding Sealing Parts Efficiently Re-investing Its Profits?

Anhui Zhongding Sealing Parts has a three-year median payout ratio of 25% (where it is retaining 75% of its income) which is not too low or not too high. So it seems that Anhui Zhongding Sealing Parts is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Anhui Zhongding Sealing Parts has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 20% of its profits over the next three years. Accordingly, forecasts suggest that Anhui Zhongding Sealing Parts' future ROE will be 12% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Anhui Zhongding Sealing Parts' performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.