Zhejiang Zomax Transmission Co., Ltd.'s (SHSE:603767) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

Zhejiang Zomax Transmission's (SHSE:603767) stock is up by a considerable 35% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on Zhejiang Zomax Transmission's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Zhejiang Zomax Transmission

How To Calculate Return On Equity?

Return on equity 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 Zhejiang Zomax Transmission is:

3.9% = CN¥57m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Zhejiang Zomax Transmission's Earnings Growth And 3.9% ROE

As you can see, Zhejiang Zomax Transmission's ROE looks pretty weak. Even when compared to the industry average of 8.3%, the ROE figure is pretty disappointing. Therefore, Zhejiang Zomax Transmission's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Zhejiang Zomax Transmission's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.2% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Zhejiang Zomax Transmission fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Zomax Transmission Using Its Retained Earnings Effectively?

Zhejiang Zomax Transmission's very high three-year median payout ratio of 148% suggests that the company is paying its shareholders more than what it is earning. The absence in growth is therefore not surprising. Paying a dividend beyond their means is usually not viable over the long term. This is quite a risky position to be in.

Moreover, Zhejiang Zomax Transmission has been paying dividends for seven years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Zhejiang Zomax Transmission. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Zhejiang Zomax Transmission 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.