Zhejiang Goldensea Hi-Tech Co., Ltd's (SHSE:603311) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Zhejiang Goldensea Hi-Tech's (SHSE:603311) stock is up by a considerable 19% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Zhejiang Goldensea Hi-Tech's ROE.

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

Check out our latest analysis for Zhejiang Goldensea Hi-Tech

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 Zhejiang Goldensea Hi-Tech is:

4.4% = CN¥57m ÷ CN¥1.3b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 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. 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.

A Side By Side comparison of Zhejiang Goldensea Hi-Tech's Earnings Growth And 4.4% ROE

It is hard to argue that Zhejiang Goldensea Hi-Tech's ROE is much good in and of itself. Even when compared to the industry average of 7.5%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 11% seen by Zhejiang Goldensea Hi-Tech over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

That being said, we compared Zhejiang Goldensea Hi-Tech's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 3.5% in the same 5-year period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Zhejiang Goldensea Hi-Tech is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Goldensea Hi-Tech Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 39% (where it is retaining 61% of its profits), Zhejiang Goldensea Hi-Tech has seen a decline 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, Zhejiang Goldensea Hi-Tech has paid dividends over a period of nine years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 38%. However, Zhejiang Goldensea Hi-Tech's ROE is predicted to rise to 7.7% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we have mixed feelings about Zhejiang Goldensea Hi-Tech. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.