Will Weakness in Zhejiang Sanhua Intelligent Controls Co.,Ltd's (SZSE:002050) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at Zhejiang Sanhua Intelligent ControlsLtd's (SZSE:002050) recent performance, when its stock has declined 12% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Zhejiang Sanhua Intelligent ControlsLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Zhejiang Sanhua Intelligent ControlsLtd

How To Calculate Return On Equity?

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 Zhejiang Sanhua Intelligent ControlsLtd is:

16% = CN¥3.0b ÷ CN¥18b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.16.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Zhejiang Sanhua Intelligent ControlsLtd's Earnings Growth And 16% ROE

At first glance, Zhejiang Sanhua Intelligent ControlsLtd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.9%. Probably as a result of this, Zhejiang Sanhua Intelligent ControlsLtd was able to see a decent growth of 20% over the last five years.

As a next step, we compared Zhejiang Sanhua Intelligent ControlsLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.5%.

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. Has the market priced in the future outlook for 002050? You can find out in our latest intrinsic value infographic research report.

Is Zhejiang Sanhua Intelligent ControlsLtd Efficiently Re-investing Its Profits?

Zhejiang Sanhua Intelligent ControlsLtd has a healthy combination of a moderate three-year median payout ratio of 40% (or a retention ratio of 60%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Zhejiang Sanhua Intelligent ControlsLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 35% of its profits over the next three years. Accordingly, forecasts suggest that Zhejiang Sanhua Intelligent ControlsLtd's future ROE will be 19% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Zhejiang Sanhua Intelligent ControlsLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com