Is ShenZhen Woer Heat-Shrinkable Material Co.,Ltd.'s (SZSE:002130) Latest Stock Performance A Reflection Of Its Financial Health?

ShenZhen Woer Heat-Shrinkable MaterialLtd's (SZSE:002130) stock is up by a considerable 41% 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 an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for ShenZhen Woer Heat-Shrinkable MaterialLtd

How Do You Calculate Return On Equity?

ROE 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 ShenZhen Woer Heat-Shrinkable MaterialLtd is:

16% = CN¥944m ÷ CN¥5.9b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.16.

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. 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.

ShenZhen Woer Heat-Shrinkable MaterialLtd's Earnings Growth And 16% ROE

At first glance, ShenZhen Woer Heat-Shrinkable MaterialLtd seems to have a decent ROE. On comparing with the average industry ROE of 6.4% the company's ROE looks pretty remarkable. Probably as a result of this, ShenZhen Woer Heat-Shrinkable MaterialLtd was able to see an impressive net income growth of 25% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that ShenZhen Woer Heat-Shrinkable MaterialLtd's growth is quite high when compared to the industry average growth of 10% 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about ShenZhen Woer Heat-Shrinkable MaterialLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is ShenZhen Woer Heat-Shrinkable MaterialLtd Making Efficient Use Of Its Profits?

ShenZhen Woer Heat-Shrinkable MaterialLtd's ' three-year median payout ratio is on the lower side at 8.2% 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.

Besides, ShenZhen Woer Heat-Shrinkable MaterialLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with ShenZhen Woer Heat-Shrinkable MaterialLtd'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. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.