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Has Hang Zhou Radical Energy-Saving Technology Co., Ltd.'s (SZSE:300652) Impressive Stock Performance Got Anything to Do With Its Fundamentals?
Hang Zhou Radical Energy-Saving Technology's (SZSE:300652) stock is up by a considerable 15% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Hang Zhou Radical Energy-Saving Technology's ROE in this article.
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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Hang Zhou Radical Energy-Saving 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 Hang Zhou Radical Energy-Saving Technology is:
8.8% = CN¥120m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn 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. 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 Hang Zhou Radical Energy-Saving Technology's Earnings Growth And 8.8% ROE
At first glance, Hang Zhou Radical Energy-Saving Technology's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.3%. Even so, Hang Zhou Radical Energy-Saving Technology has shown a fairly decent growth in its net income which grew at a rate of 17%. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Hang Zhou Radical Energy-Saving Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.2%.
Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Hang Zhou Radical Energy-Saving Technology is trading on a high P/E or a low P/E, relative to its industry.
Is Hang Zhou Radical Energy-Saving Technology Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 38% (implying that the company retains 62% of its profits), it seems that Hang Zhou Radical Energy-Saving Technology is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Moreover, Hang Zhou Radical Energy-Saving Technology is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.
Conclusion
Overall, we feel that Hang Zhou Radical Energy-Saving Technology certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Hang Zhou Radical Energy-Saving Technology visit our risks dashboard for free.
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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.
About SZSE:300652
Hang Zhou Radical Energy-Saving Technology
Hang Zhou Radical Energy-Saving Technology Co., Ltd.
Flawless balance sheet low.