Zhejiang grandwall electric science&technology co.,ltd.'s (SHSE:603897) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Zhejiang grandwall electric science&technologyltd's (SHSE:603897) stock is up by a considerable 11% over the past week. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to Zhejiang grandwall electric science&technologyltd's ROE today.

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 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 Zhejiang grandwall electric science&technologyltd

How To 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 grandwall electric science&technologyltd is:

10% = CN¥270m ÷ CN¥2.6b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 grandwall electric science&technologyltd's Earnings Growth And 10% ROE

On the face of it, Zhejiang grandwall electric science&technologyltd's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.9%, is definitely interesting. Yet, Zhejiang grandwall electric science&technologyltd has posted measly growth of 2.6% over the past five years. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Therefore, the low growth in earnings could also be the result of this.

As a next step, we compared Zhejiang grandwall electric science&technologyltd'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 12% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 grandwall electric science&technologyltd is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang grandwall electric science&technologyltd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 91% (that is, the company retains only 9.1% of its income) over the past three years for Zhejiang grandwall electric science&technologyltd suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Moreover, Zhejiang grandwall electric science&technologyltd has been paying dividends for five 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, Zhejiang grandwall electric science&technologyltd's performance is quite a big let-down. While its ROE is pretty moderate, the company is retaining very little of its profits, meaning very little of its profits are being reinvested into the business. This explains the lack or absence of growth in its earnings. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. To know the 1 risk we have identified for Zhejiang grandwall electric science&technologyltd visit our risks dashboard for free.

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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.