Are Robust Financials Driving The Recent Rally In Anhui Zhongding Sealing Parts Co., Ltd.'s (SZSE:000887) Stock?

Anhui Zhongding Sealing Parts' (SZSE:000887) stock is up by a considerable 64% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Anhui Zhongding Sealing Parts' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Anhui Zhongding Sealing Parts

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 Anhui Zhongding Sealing Parts is:

10% = CN¥1.3b ÷ CN¥13b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

A Side By Side comparison of Anhui Zhongding Sealing Parts' Earnings Growth And 10% ROE

On the face of it, Anhui Zhongding Sealing Parts' ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 8.3%, is definitely interesting. Especially when you consider Anhui Zhongding Sealing Parts' exceptional 20% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence, there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Anhui Zhongding Sealing Parts' growth is quite high when compared to the industry average growth of 9.2% in the same period, which is great to see.

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. Is Anhui Zhongding Sealing Parts fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Anhui Zhongding Sealing Parts Making Efficient Use Of Its Profits?

The three-year median payout ratio for Anhui Zhongding Sealing Parts is 25%, which is moderately low. The company is retaining the remaining 75%. By the looks of it, the dividend is well covered and Anhui Zhongding Sealing Parts is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Anhui Zhongding Sealing Parts has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 20% of its profits over the next three years. As a result, Anhui Zhongding Sealing Parts' ROE is not expected to change by much either, which we inferred from the analyst estimate of 12% for future ROE.

Summary

On the whole, we feel that Anhui Zhongding Sealing Parts' performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.