Wuxi Autowell TechnologyLtd (SHSE:688516) has had a great run on the share market with its stock up by a significant 27% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Wuxi Autowell TechnologyLtd's ROE in this article.

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 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?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Wuxi Autowell TechnologyLtd is:

35% = CN¥1.6b ÷ CN¥4.6b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.35 in profit.

Why Is ROE Important For 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. 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.

Wuxi Autowell TechnologyLtd's Earnings Growth And 35% ROE

Firstly, we acknowledge that Wuxi Autowell TechnologyLtd has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 6.4% also doesn't go unnoticed by us. As a result, Wuxi Autowell TechnologyLtd's exceptional 53% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Wuxi Autowell TechnologyLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.

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. Has the market priced in the future outlook for 688516? You can find out in our latest intrinsic value infographic research report.

Is Wuxi Autowell TechnologyLtd Making Efficient Use Of Its Profits?

Wuxi Autowell TechnologyLtd's three-year median payout ratio is a pretty moderate 33%, meaning the company retains 67% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Wuxi Autowell TechnologyLtd is reinvesting its earnings efficiently.

Additionally, Wuxi Autowell TechnologyLtd has paid dividends over a period of four 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 38%. However, Wuxi Autowell TechnologyLtd's future ROE is expected to decline to 25% despite there being not much change anticipated in the company's payout ratio.

Conclusion

Overall, we are quite pleased with Wuxi Autowell TechnologyLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.