Are Poor Financial Prospects Dragging Down Zoomlion Heavy Industry Science and Technology Co., Ltd. (SZSE:000157 Stock?

With its stock down 3.4% over the past month, it is easy to disregard Zoomlion Heavy Industry Science and Technology (SZSE:000157). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Zoomlion Heavy Industry Science and Technology's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Zoomlion Heavy Industry Science and Technology

How Is ROE Calculated?

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 Zoomlion Heavy Industry Science and Technology is:

6.5% = CN¥3.9b ÷ CN¥60b (Based on the trailing twelve months to March 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¥0.07 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Zoomlion Heavy Industry Science and Technology's Earnings Growth And 6.5% ROE

On the face of it, Zoomlion Heavy Industry Science and Technology's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.9%. But then again, Zoomlion Heavy Industry Science and Technology's five year net income shrunk at a rate of 9.2%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

So, as a next step, we compared Zoomlion Heavy Industry Science and Technology's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 9.5% over the last few years.

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 Zoomlion Heavy Industry Science and Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zoomlion Heavy Industry Science and Technology Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 74% (implying that 26% of the profits are retained), most of Zoomlion Heavy Industry Science and Technology's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 3 risks we have identified for Zoomlion Heavy Industry Science and Technology.

In addition, Zoomlion Heavy Industry Science and Technology has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 53% over the next three years. As a result, the expected drop in Zoomlion Heavy Industry Science and Technology's payout ratio explains the anticipated rise in the company's future ROE to 9.6%, over the same period.

Summary

In total, we would have a hard think before deciding on any investment action concerning Zoomlion Heavy Industry Science and Technology. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.