Zhengzhou Coal Mining Machinery Group Company Limited's (SHSE:601717) Stock Has Fared Decently: Is the Market Following Strong Financials?

Most readers would already know that Zhengzhou Coal Mining Machinery Group's (SHSE:601717) stock increased by 7.0% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Zhengzhou Coal Mining Machinery Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 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 Zhengzhou Coal Mining Machinery Group is:

18% = CN¥4.0b ÷ CN¥23b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned 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¥0.18 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. 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.

Zhengzhou Coal Mining Machinery Group's Earnings Growth And 18% 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%. Probably as a result of this, Zhengzhou Coal Mining Machinery Group 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. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Zhengzhou Coal Mining Machinery Group's growth is quite high when compared to the industry average growth of 8.3% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Zhengzhou Coal Mining Machinery Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared 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 37%, meaning the company retains 63% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Zhengzhou Coal Mining Machinery Group is reinvesting its earnings efficiently.

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

Overall, we are quite pleased with Zhengzhou Coal Mining Machinery Group'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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.