WINBO-Dongjian Automotive Technology (SZSE:300978) has had a rough three months with its share price down 13%. We decided to study the company’s financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study WINBO-Dongjian Automotive Technology’s ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for WINBO-Dongjian Automotive Technology

How To Calculate Return On Equity?

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 WINBO-Dongjian Automotive Technology is:

8.7% = CN¥147m ÷ CN¥1.7b (Based on the trailing twelve months to March 2024).

The ‘return’ is the yearly profit. That means that for every CN¥1 worth of shareholders’ equity, the company generated CN¥0.09 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.

WINBO-Dongjian Automotive Technology’s Earnings Growth And 8.7% ROE

On the face of it, WINBO-Dongjian Automotive Technology’s ROE is not much to talk about. Yet, a closer study shows that the company’s ROE is similar to the industry average of 8.2%. Having said that, WINBO-Dongjian Automotive Technology’s five year net income decline rate was 15%. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.

That being said, we compared WINBO-Dongjian Automotive Technology’s performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 8.9% 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 WINBO-Dongjian Automotive Technology’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is WINBO-Dongjian Automotive Technology Efficiently Re-investing Its Profits?

WINBO-Dongjian Automotive Technology has a high three-year median payout ratio of 58% (that is, it is retaining 42% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 3 risks we have identified for WINBO-Dongjian Automotive Technology.

Moreover, WINBO-Dongjian Automotive Technology has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Conclusion

On the whole, WINBO-Dongjian Automotive Technology’s performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we’ve only made a short study of the company’s growth data. You can do your own research on WINBO-Dongjian Automotive Technology and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.