Sichuan Zigong Conveying Machine Group Co., Ltd. (SZSE:001288) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Sichuan Zigong Conveying Machine Group (SZSE:001288) has had a great run on the share market with its stock up by a significant 51% over the last three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Sichuan Zigong Conveying Machine Group's ROE today.

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

Check out our latest analysis for Sichuan Zigong Conveying Machine Group

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 Sichuan Zigong Conveying Machine Group is:

5.0% = CN¥105m ÷ CN¥2.1b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Sichuan Zigong Conveying Machine Group's Earnings Growth And 5.0% ROE

At first glance, Sichuan Zigong Conveying Machine Group's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 6.9% either. Hence, the flat earnings seen by Sichuan Zigong Conveying Machine Group over the past five years could probably be the result of it having a lower ROE.

We then compared Sichuan Zigong Conveying Machine Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.5% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Sichuan Zigong Conveying Machine Group is trading on a high P/E or a low P/E, relative to its industry.

Is Sichuan Zigong Conveying Machine Group Efficiently Re-investing Its Profits?

Sichuan Zigong Conveying Machine Group's low three-year median payout ratio of 19%, (meaning the company retains81% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

Only recently, Sichuan Zigong Conveying Machine Group started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Summary

In total, we're a bit ambivalent about Sichuan Zigong Conveying Machine Group's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. You can do your own research on Sichuan Zigong Conveying Machine Group and see how it has performed in the past by looking at this FREE detailed graph 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.