Will Weakness in Zhejiang Weixing New Building Materials Co., Ltd.'s (SZSE:002372) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 12% over the past three months, it is easy to disregard Zhejiang Weixing New Building Materials (SZSE:002372). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Zhejiang Weixing New Building Materials' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Zhejiang Weixing New Building Materials

How To 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 Zhejiang Weixing New Building Materials is:

24% = CN¥1.2b ÷ CN¥4.9b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.24 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of Zhejiang Weixing New Building Materials' Earnings Growth And 24% ROE

Firstly, we acknowledge that Zhejiang Weixing New Building Materials has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 7.5% which is quite remarkable. This likely paved the way for the modest 6.8% net income growth seen by Zhejiang Weixing New Building Materials over the past five years.

Next, on comparing with the industry net income growth, we found that Zhejiang Weixing New Building Materials' growth is quite high when compared to the industry average growth of 3.5% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for 002372? You can find out in our latest intrinsic value infographic research report.

Is Zhejiang Weixing New Building Materials Efficiently Re-investing Its Profits?

Zhejiang Weixing New Building Materials has a significant three-year median payout ratio of 78%, meaning that it is left with only 22% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Zhejiang Weixing New Building Materials 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 79%. As a result, Zhejiang Weixing New Building Materials' ROE is not expected to change by much either, which we inferred from the analyst estimate of 23% for future ROE.

Summary

In total, we are pretty happy with Zhejiang Weixing New Building Materials' performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.