Is ZHEJIANG DIBAY ELECTRIC CO.,Ltd.'s (SHSE:603320) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

ZHEJIANG DIBAY ELECTRICLtd (SHSE:603320) has had a great run on the share market with its stock up by a significant 15% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to ZHEJIANG DIBAY ELECTRICLtd's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for ZHEJIANG DIBAY ELECTRICLtd

How Do You 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 DIBAY ELECTRICLtd is:

8.3% = CN¥74m ÷ CN¥895m (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.08 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. 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. 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 DIBAY ELECTRICLtd's Earnings Growth And 8.3% ROE

At first glance, ZHEJIANG DIBAY ELECTRICLtd's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 6.3% doesn't go unnoticed by us. Having said that, ZHEJIANG DIBAY ELECTRICLtd's net income growth over the past five years is more or less flat. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Therefore, the low to flat growth in earnings could also be the result of this.

As a next step, we compared ZHEJIANG DIBAY ELECTRICLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 7.4% in the same period.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is ZHEJIANG DIBAY ELECTRICLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is ZHEJIANG DIBAY ELECTRICLtd Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 33% (implying that the company keeps 67% of its income) over the last three years, ZHEJIANG DIBAY ELECTRICLtd has seen a negligible amount of 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.

Moreover, ZHEJIANG DIBAY ELECTRICLtd has been paying dividends for seven years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, we do feel that ZHEJIANG DIBAY ELECTRICLtd has some positive attributes. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of ZHEJIANG DIBAY ELECTRICLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.