Most readers would already be aware that Anhui Yingliu Electromechanical's (SHSE:603308) stock increased significantly by 26% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Anhui Yingliu Electromechanical'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 Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Anhui Yingliu Electromechanical is:

5.3% = CN¥264m ÷ CN¥5.0b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Anhui Yingliu Electromechanical's Earnings Growth And 5.3% ROE

When you first look at it, Anhui Yingliu Electromechanical's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.3%. Moreover, we are quite pleased to see that Anhui Yingliu Electromechanical's net income grew significantly at a rate of 20% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this 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 Anhui Yingliu Electromechanical's growth is quite high when compared to the industry average growth of 7.4% 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 Yingliu Electromechanical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Anhui Yingliu Electromechanical Efficiently Re-investing Its Profits?

The three-year median payout ratio for Anhui Yingliu Electromechanical is 28%, which is moderately low. The company is retaining the remaining 72%. By the looks of it, the dividend is well covered and Anhui Yingliu Electromechanical is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Anhui Yingliu Electromechanical 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 25%. Regardless, the future ROE for Anhui Yingliu Electromechanical is predicted to rise to 10% despite there being not much change expected in its payout ratio.

Summary

In total, it does look like Anhui Yingliu Electromechanical has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.