Has Zhongtong Bus Holding Co.,LTD's (SZSE:000957) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Zhongtong Bus HoldingLTD's (SZSE:000957) stock increased significantly by 13% over the past week. 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. In this article, we decided to focus on Zhongtong Bus HoldingLTD's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Zhongtong Bus HoldingLTD

How To Calculate Return On Equity?

Return on equity 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 Zhongtong Bus HoldingLTD is:

4.6% = CN¥129m ÷ CN¥2.8b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 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. 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.

Zhongtong Bus HoldingLTD's Earnings Growth And 4.6% ROE

As you can see, Zhongtong Bus HoldingLTD's ROE looks pretty weak. Even when compared to the industry average of 7.0%, the ROE figure is pretty disappointing. Despite this, surprisingly, Zhongtong Bus HoldingLTD saw an exceptional 25% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Zhongtong Bus HoldingLTD's growth is quite high when compared to the industry average growth of 8.8% in the same period, which is great to see.

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. Is Zhongtong Bus HoldingLTD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhongtong Bus HoldingLTD Using Its Retained Earnings Effectively?

Zhongtong Bus HoldingLTD's three-year median payout ratio to shareholders is 22%, which is quite low. This implies that the company is retaining 78% of its profits. So it looks like Zhongtong Bus HoldingLTD is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Zhongtong Bus HoldingLTD has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we feel that Zhongtong Bus HoldingLTD certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Zhongtong Bus HoldingLTD.

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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.