Zhejiang Weigang Technology Co., Ltd.'s (SZSE:001256) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Zhejiang Weigang Technology's (SZSE:001256) stock increased significantly by 20% over the past three months. 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 Weigang Technology's ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Zhejiang Weigang Technology

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Zhejiang Weigang Technology is:

8.8% = CN¥98m ÷ CN¥1.1b (Based on the trailing twelve months to June 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¥0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Weigang Technology's Earnings Growth And 8.8% ROE

When you first look at it, Zhejiang Weigang Technology's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 7.0%, is definitely interesting. Having said that, Zhejiang Weigang Technology's net income growth over the past five years is more or less flat. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the flat earnings growth.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 8.7% 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Zhejiang Weigang Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Weigang Technology Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 28% (implying that the company keeps 72% of its income) over the last three years, Zhejiang Weigang Technology has seen a negligible amount of growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Only recently, Zhejiang Weigang Technology started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Conclusion

Overall, we feel that Zhejiang Weigang Technology certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Zhejiang Weigang Technology's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.