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

With its stock down 8.8% over the past three months, 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. Specifically, we decided to study Zhejiang Songyuan Automotive Safety SystemsLtd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Zhejiang Songyuan Automotive Safety SystemsLtd

How To Calculate Return On Equity?

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 Songyuan Automotive Safety SystemsLtd is:

21% = CN¥271m ÷ CN¥1.3b (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¥0.21 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Zhejiang Songyuan Automotive Safety SystemsLtd's Earnings Growth And 21% ROE

To begin with, Zhejiang Songyuan Automotive Safety SystemsLtd seems to have a respectable ROE. On comparing with the average industry ROE of 8.3% the company's ROE looks pretty remarkable. Probably as a result of this, Zhejiang Songyuan Automotive Safety SystemsLtd was able to see an impressive net income growth of 27% over the last five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Zhejiang Songyuan Automotive Safety SystemsLtd'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 9.2% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is 300893 worth today? The intrinsic value infographic in our free research report helps visualize whether 300893 is currently mispriced by the market.

Is Zhejiang Songyuan Automotive Safety SystemsLtd Using Its Retained Earnings Effectively?

Zhejiang Songyuan Automotive Safety SystemsLtd's ' three-year median payout ratio is on the lower side at 20% implying that it is retaining a higher percentage (80%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Zhejiang Songyuan Automotive Safety SystemsLtd has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 13% 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

On the whole, we feel that Zhejiang Songyuan Automotive Safety SystemsLtd's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.