Huada Automotive Technology Corp.,Ltd’s (SHSE:603358) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Huada Automotive TechnologyLtd’s (SHSE:603358) stock increased significantly by 8.0% over the past month. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Huada Automotive TechnologyLtd’s ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

See our latest analysis for Huada Automotive TechnologyLtd

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Huada Automotive TechnologyLtd is:

8.4% = CN¥308m ÷ CN¥3.7b (Based on the trailing twelve months to September 2023).

The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders’ capital it has, the company made CN¥0.08 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

Huada Automotive TechnologyLtd’s Earnings Growth And 8.4% ROE

At first glance, Huada Automotive TechnologyLtd’s ROE doesn’t look very promising. However, its ROE is similar to the industry average of 7.5%, so we won’t completely dismiss the company. Even so, Huada Automotive TechnologyLtd has shown a fairly decent growth in its net income which grew at a rate of 13%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company’s growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Huada Automotive 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 4.1%.

past-earnings-growth
SHSE:603358 Past Earnings Growth March 23rd 2024

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Huada Automotive TechnologyLtd’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Huada Automotive TechnologyLtd Efficiently Re-investing Its Profits?

Huada Automotive TechnologyLtd has a three-year median payout ratio of 44%, which implies that it retains the remaining 56% 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, Huada Automotive TechnologyLtd has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we do feel that Huada Automotive TechnologyLtd has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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

Find out whether Huada Automotive TechnologyLtd 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.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

link