Could The Market Be Wrong About Zhejiang Songyuan Automotive Safety Systems Co.,Ltd. (SZSE:300893) Given Its Attractive Financial Prospects?

With its stock down 6.9% over the past week, it is easy to disregard Zhejiang Songyuan Automotive Safety SystemsLtd (SZSE:300893). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Zhejiang Songyuan Automotive Safety SystemsLtd's ROE today.

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.

Check out our latest analysis for Zhejiang Songyuan Automotive Safety SystemsLtd

How Is ROE Calculated?

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 Songyuan Automotive Safety SystemsLtd is:

20% = CN¥226m ÷ CN¥1.1b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.20 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. 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.

A Side By Side comparison of Zhejiang Songyuan Automotive Safety SystemsLtd's Earnings Growth And 20% ROE

To begin with, Zhejiang Songyuan Automotive Safety SystemsLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.2%. This certainly adds some context to Zhejiang Songyuan Automotive Safety SystemsLtd's exceptional 23% net income growth seen over the past five years. We reckon that there could also 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 Songyuan Automotive Safety SystemsLtd's growth is quite high when compared to the industry average growth of 8.7% 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. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for 300893? You can find out in our latest intrinsic value infographic research report.

Is Zhejiang Songyuan Automotive Safety SystemsLtd Efficiently Re-investing Its Profits?

Zhejiang Songyuan Automotive Safety SystemsLtd's three-year median payout ratio is a pretty moderate 27%, meaning the company retains 73% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Zhejiang Songyuan Automotive Safety SystemsLtd is reinvesting its earnings efficiently.

Besides, Zhejiang Songyuan Automotive Safety SystemsLtd has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 14% over the next three years. As a result, the expected drop in Zhejiang Songyuan Automotive Safety SystemsLtd's payout ratio explains the anticipated rise in the company's future ROE to 28%, over the same period.

Conclusion

Overall, we are quite pleased with Zhejiang Songyuan Automotive Safety SystemsLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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