Zhongzhong Science & Technology (Tianjin) Co., Ltd.'s (SHSE:603135) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Zhongzhong Science & Technology (Tianjin) (SHSE:603135) has had a great run on the share market with its stock up by a significant 18% over the last month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Zhongzhong Science & Technology (Tianjin)'s ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Zhongzhong Science & Technology (Tianjin)

How Is ROE Calculated?

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 Zhongzhong Science & Technology (Tianjin) is:

4.0% = CN¥120m ÷ CN¥3.0b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 Zhongzhong Science & Technology (Tianjin)'s Earnings Growth And 4.0% ROE

As you can see, Zhongzhong Science & Technology (Tianjin)'s ROE looks pretty weak. Not just that, even compared to the industry average of 7.0%, the company's ROE is entirely unremarkable. Accordingly, Zhongzhong Science & Technology (Tianjin)'s low net income growth of 3.3% over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that Zhongzhong Science & Technology (Tianjin)'s reported growth was lower than the industry growth of 8.7% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Zhongzhong Science & Technology (Tianjin)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhongzhong Science & Technology (Tianjin) Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 41% (or a retention ratio of 59% over the past three years, Zhongzhong Science & Technology (Tianjin) has seen very little growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Zhongzhong Science & Technology (Tianjin) started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Zhongzhong Science & Technology (Tianjin). While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Zhongzhong Science & Technology (Tianjin).

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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.