Zhejiang Xidamen New Material Co.,Ltd.'s (SHSE:605155) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Zhejiang Xidamen New MaterialLtd's (SHSE:605155) stock is up by a considerable 11% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Zhejiang Xidamen New MaterialLtd's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Zhejiang Xidamen New MaterialLtd

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 Xidamen New MaterialLtd is:

8.2% = CN¥99m ÷ CN¥1.2b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. 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.

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 Xidamen New MaterialLtd's Earnings Growth And 8.2% ROE

At first glance, Zhejiang Xidamen New MaterialLtd's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 7.2%, we may spare it some thought. We can see that Zhejiang Xidamen New MaterialLtd has grown at a five year net income growth average rate of 2.8%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.

Next, on comparing Zhejiang Xidamen New MaterialLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 2.5% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Zhejiang Xidamen New MaterialLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Xidamen New MaterialLtd Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 30% (implying that the company retains the remaining 70% of its income), Zhejiang Xidamen New MaterialLtd's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Zhejiang Xidamen New MaterialLtd has been paying dividends over a period of three years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, we do feel that Zhejiang Xidamen New MaterialLtd has some positive attributes. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.