Are Strong Financial Prospects The Force That Is Driving The Momentum In Zhejiang Qianjiang Motorcycle Co., Ltd.'s SZSE:000913) Stock?

Zhejiang Qianjiang Motorcycle (SZSE:000913) has had a great run on the share market with its stock up by a significant 24% over the last 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 Zhejiang Qianjiang Motorcycle's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Zhejiang Qianjiang Motorcycle

How Is ROE Calculated?

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 Zhejiang Qianjiang Motorcycle is:

11% = CN¥523m ÷ CN¥4.6b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.11 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Zhejiang Qianjiang Motorcycle's Earnings Growth And 11% ROE

To begin with, Zhejiang Qianjiang Motorcycle seems to have a respectable ROE. On comparing with the average industry ROE of 5.9% the company's ROE looks pretty remarkable. This certainly adds some context to Zhejiang Qianjiang Motorcycle's exceptional 24% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Zhejiang Qianjiang Motorcycle'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 14% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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 Zhejiang Qianjiang Motorcycle fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Qianjiang Motorcycle Efficiently Re-investing Its Profits?

The three-year median payout ratio for Zhejiang Qianjiang Motorcycle is 27%, which is moderately low. The company is retaining the remaining 73%. By the looks of it, the dividend is well covered and Zhejiang Qianjiang Motorcycle is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Zhejiang Qianjiang Motorcycle has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we are quite pleased with Zhejiang Qianjiang Motorcycle'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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com