Is ShenZhen Woer Heat-Shrinkable Material Co.,Ltd.'s (SZSE:002130) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that ShenZhen Woer Heat-Shrinkable MaterialLtd's (SZSE:002130) stock increased significantly by 124% 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. Specifically, we decided to study ShenZhen Woer Heat-Shrinkable MaterialLtd's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for ShenZhen Woer Heat-Shrinkable MaterialLtd

How Do You 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 ShenZhen Woer Heat-Shrinkable MaterialLtd is:

15% = CN¥843m ÷ CN¥5.6b (Based on the trailing twelve months to March 2024).

The 'return' is the profit 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¥0.15.

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.

A Side By Side comparison of ShenZhen Woer Heat-Shrinkable MaterialLtd's Earnings Growth And 15% ROE

To begin with, ShenZhen Woer Heat-Shrinkable MaterialLtd seems to have a respectable ROE. On comparing with the average industry ROE of 6.9% the company's ROE looks pretty remarkable. This probably laid the ground for ShenZhen Woer Heat-Shrinkable MaterialLtd's significant 32% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared ShenZhen Woer Heat-Shrinkable MaterialLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is ShenZhen Woer Heat-Shrinkable MaterialLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is ShenZhen Woer Heat-Shrinkable MaterialLtd Efficiently Re-investing Its Profits?

ShenZhen Woer Heat-Shrinkable MaterialLtd's ' three-year median payout ratio is on the lower side at 8.1% implying that it is retaining a higher percentage (92%) of its profits. So it looks like ShenZhen Woer Heat-Shrinkable MaterialLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, ShenZhen Woer Heat-Shrinkable MaterialLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

In total, we are pretty happy with ShenZhen Woer Heat-Shrinkable MaterialLtd'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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.