Zhengzhou Coal Mining Machinery Group Company Limited (SHSE:601717) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 16% over the past three months, it is easy to disregard Zhengzhou Coal Mining Machinery Group (SHSE:601717). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Zhengzhou Coal Mining Machinery Group's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. 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 Zhengzhou Coal Mining Machinery Group

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 Zhengzhou Coal Mining Machinery Group is:

16% = CN¥3.8b ÷ CN¥23b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.16.

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. 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 Zhengzhou Coal Mining Machinery Group's Earnings Growth And 16% ROE

To begin with, Zhengzhou Coal Mining Machinery Group seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.9%. This certainly adds some context to Zhengzhou Coal Mining Machinery Group's exceptional 26% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Zhengzhou Coal Mining Machinery Group'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 9.5%.

Earnings growth is a huge factor in stock valuation. 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. 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 Zhengzhou Coal Mining Machinery Group is trading on a high P/E or a low P/E, relative to its industry.

Is Zhengzhou Coal Mining Machinery Group Using Its Retained Earnings Effectively?

Zhengzhou Coal Mining Machinery Group's three-year median payout ratio is a pretty moderate 36%, meaning the company retains 64% of its income. By the looks of it, the dividend is well covered and Zhengzhou Coal Mining Machinery Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Zhengzhou Coal Mining Machinery Group 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.

Summary

On the whole, we feel that Zhengzhou Coal Mining Machinery Group'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

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