Zhejiang Sanhua Intelligent Controls Co.,Ltd's (SZSE:002050) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Zhejiang Sanhua Intelligent ControlsLtd's (SZSE:002050) stock increased significantly by 44% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Zhejiang Sanhua Intelligent ControlsLtd's ROE today.

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 Sanhua Intelligent ControlsLtd

How Is ROE Calculated?

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 Sanhua Intelligent ControlsLtd is:

16% = CN¥3.1b ÷ CN¥19b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.16 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.

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

At first glance, Zhejiang Sanhua Intelligent ControlsLtd seems to have a decent ROE. On comparing with the average industry ROE of 6.3% the company's ROE looks pretty remarkable. Probably as a result of this, Zhejiang Sanhua Intelligent ControlsLtd was able to see an impressive net income growth of 20% over the last five years. However, there could also be other causes 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 Zhejiang Sanhua Intelligent ControlsLtd's growth is quite high when compared to the industry average growth of 7.3% 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. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 Making Efficient Use Of Its Profits?

The three-year median payout ratio for Zhejiang Sanhua Intelligent ControlsLtd is 40%, which is moderately low. The company is retaining the remaining 60%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Zhejiang Sanhua Intelligent ControlsLtd is reinvesting its earnings efficiently.

Besides, Zhejiang Sanhua Intelligent ControlsLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 34%. Accordingly, forecasts suggest that Zhejiang Sanhua Intelligent ControlsLtd's future ROE will be 18% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Zhejiang Sanhua Intelligent ControlsLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.