Chuzhou Duoli Automotive Technology Co., Ltd.’s (SZSE:001311) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Chuzhou Duoli Automotive Technology (SZSE:001311) has had a rough three months with its share price down 19%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Chuzhou Duoli Automotive Technology’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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Chuzhou Duoli Automotive Technology

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 Chuzhou Duoli Automotive Technology is:

12% = CN¥518m ÷ CN¥4.2b (Based on the trailing twelve months to September 2023).

The ‘return’ is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders’ equity, the company generated CN¥0.12 in profit.

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. 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. 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.

Chuzhou Duoli Automotive Technology’s Earnings Growth And 12% ROE

At first glance, Chuzhou Duoli Automotive Technology seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 7.5%. Probably as a result of this, Chuzhou Duoli Automotive Technology was able to see an impressive net income growth of 23% over the last five years. However, there could also be other causes behind this growth. Such as – high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Chuzhou Duoli Automotive Technology’s growth is quite high when compared to the industry average growth of 4.1% in the same period, which is great to see.

past-earnings-growth
SZSE:001311 Past Earnings Growth March 25th 2024

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. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Chuzhou Duoli Automotive Technology’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chuzhou Duoli Automotive Technology Efficiently Re-investing Its Profits?

Chuzhou Duoli Automotive Technology has a really low three-year median payout ratio of 17%, meaning that it has the remaining 83% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

While Chuzhou Duoli Automotive Technology has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we feel that Chuzhou Duoli Automotive Technology’s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.

Valuation is complex, but we’re helping make it simple.

Find out whether Chuzhou Duoli Automotive Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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