Changzhou Xingyu Automotive Lighting SystemsLtd's (SHSE:601799) stock is up by a considerable 13% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Changzhou Xingyu Automotive Lighting SystemsLtd's 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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 Changzhou Xingyu Automotive Lighting SystemsLtd is:

13% = CN¥1.3b ÷ CN¥9.7b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.13.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

A Side By Side comparison of Changzhou Xingyu Automotive Lighting SystemsLtd's Earnings Growth And 13% ROE

To begin with, Changzhou Xingyu Automotive Lighting SystemsLtd seems to have a respectable ROE. Especially when compared to the industry average of 8.3% the company's ROE looks pretty impressive. Probably as a result of this, Changzhou Xingyu Automotive Lighting SystemsLtd was able to see a decent growth of 5.2% over the last five years.

Next, on comparing with the industry net income growth, we found that Changzhou Xingyu Automotive Lighting SystemsLtd's reported growth was lower than the industry growth of 9.2% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Changzhou Xingyu Automotive Lighting SystemsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Changzhou Xingyu Automotive Lighting SystemsLtd Using Its Retained Earnings Effectively?

Changzhou Xingyu Automotive Lighting SystemsLtd has a three-year median payout ratio of 32%, which implies that it retains the remaining 68% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Changzhou Xingyu Automotive Lighting SystemsLtd 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. 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 27%. However, Changzhou Xingyu Automotive Lighting SystemsLtd's ROE is predicted to rise to 17% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that Changzhou Xingyu Automotive Lighting SystemsLtd'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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.