Declining Stock and Solid Fundamentals: Is The Market Wrong About Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology Co., Ltd. (SHSE:603300)?

Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology (SHSE:603300) has had a rough week with its share price down 14%. 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 Haikong Nanke Huatie Digital Intelligence and Technology's ROE today.

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.

View our latest analysis for Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology

How Do You 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 Haikong Nanke Huatie Digital Intelligence and Technology is:

12% = CN¥756m ÷ CN¥6.2b (Based on the trailing twelve months to September 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¥0.12 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology's Earnings Growth And 12% ROE

To start with, Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology's ROE looks acceptable. On comparing with the average industry ROE of 6.5% the company's ROE looks pretty remarkable. This probably laid the ground for Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology's significant 27% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology'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 6.7% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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 Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology Efficiently Re-investing Its Profits?

Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology has a really low three-year median payout ratio of 12%, meaning that it has the remaining 88% left over to reinvest into its business. 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 Haikong Nanke Huatie Digital Intelligence and Technology has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.