Most readers would already be aware that Neway CNC Equipment (Suzhou)'s (SHSE:688697) stock increased significantly by 29% over the past 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. Particularly, we will be paying attention to Neway CNC Equipment (Suzhou)'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments. automatic glass cutting line
See our latest analysis for Neway CNC Equipment (Suzhou)
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 Neway CNC Equipment (Suzhou) is:
20% = CN¥318m ÷ CN¥1.6b (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.20 in profit.
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
To begin with, Neway CNC Equipment (Suzhou) seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.4%. Probably as a result of this, Neway CNC Equipment (Suzhou) was able to see an impressive net income growth of 33% over the last five years. However, there could also be other causes behind this 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.
Next, on comparing with the industry net income growth, we found that Neway CNC Equipment (Suzhou)'s growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Neway CNC Equipment (Suzhou) is trading on a high P/E or a low P/E, relative to its industry.
The three-year median payout ratio for Neway CNC Equipment (Suzhou) is 42%, which is moderately low. The company is retaining the remaining 58%. So it seems that Neway CNC Equipment (Suzhou) is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
While Neway CNC Equipment (Suzhou) has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.
Overall, we are quite pleased with Neway CNC Equipment (Suzhou)'s performance. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
Find out whether Neway CNC Equipment (Suzhou) 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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Neway CNC Equipment (Suzhou) Co., Ltd. engages in the research and development, production, and sales of medium and high-end CNC machine tools in China and internationally.
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