Zhejiang Asia-Pacific Mechanical & Electronic Co.,Ltd's (SZSE:002284) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Zhejiang Asia-Pacific Mechanical & ElectronicLtd's (SZSE:002284) stock is up by a considerable 23% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Zhejiang Asia-Pacific Mechanical & ElectronicLtd'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Zhejiang Asia-Pacific Mechanical & ElectronicLtd

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Zhejiang Asia-Pacific Mechanical & ElectronicLtd is:

5.4% = CN¥157m ÷ CN¥2.9b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Zhejiang Asia-Pacific Mechanical & ElectronicLtd's Earnings Growth And 5.4% ROE

On the face of it, Zhejiang Asia-Pacific Mechanical & ElectronicLtd's ROE is not much to talk about. Next, when compared to the average industry ROE of 8.3%, the company's ROE leaves us feeling even less enthusiastic. Despite this, surprisingly, Zhejiang Asia-Pacific Mechanical & ElectronicLtd saw an exceptional 57% net income growth over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Zhejiang Asia-Pacific Mechanical & ElectronicLtd's growth is quite high when compared to the industry average growth of 9.2% in the same period, which is great to see.

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. If you're wondering about Zhejiang Asia-Pacific Mechanical & ElectronicLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Asia-Pacific Mechanical & ElectronicLtd Efficiently Re-investing Its Profits?

Zhejiang Asia-Pacific Mechanical & ElectronicLtd's very high three-year median payout ratio of 107% suggests that the company is paying more to its shareholders than what it is earning. However, this hasn't hampered its ability to grow as we saw earlier. Having said that, the high payout ratio is definitely risky and something to keep an eye on.

Moreover, Zhejiang Asia-Pacific Mechanical & ElectronicLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

On the whole, we feel that the performance shown by Zhejiang Asia-Pacific Mechanical & ElectronicLtd can be open to many interpretations. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.