Chuzhou Duoli Automotive Technology Co., Ltd.'s (SZSE:001311) Stock Is Going Strong: Is the Market Following Fundamentals?

Chuzhou Duoli Automotive Technology's (SZSE:001311) stock is up by a considerable 17% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Chuzhou Duoli Automotive Technology's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Chuzhou Duoli Automotive Technology

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 Chuzhou Duoli Automotive Technology is:

11% = CN¥466m ÷ CN¥4.4b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.11.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Chuzhou Duoli Automotive Technology's Earnings Growth And 11% ROE

At first glance, Chuzhou Duoli Automotive Technology's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 8.5%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 20% seen over the past five years by Chuzhou Duoli Automotive Technology. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

We then compared Chuzhou Duoli Automotive Technology's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.9% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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?

In Chuzhou Duoli Automotive Technology's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 17% (or a retention ratio of 83%), which suggests that the company is investing most of its profits to grow its business.

Along with seeing a growth in earnings, Chuzhou Duoli Automotive Technology only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

On the whole, we feel that Chuzhou Duoli Automotive Technology's performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.