Zhejiang Weixing New Building Materials Co., Ltd.'s (SZSE:002372) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 12% over the past month, 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. In this article, we decided to focus on Zhejiang Weixing New Building Materials' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Zhejiang Weixing New Building Materials

How Do You Calculate Return On Equity?

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 Weixing New Building Materials is:

25% = CN¥1.4b ÷ CN¥5.9b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.25 in profit.

What Is The Relationship Between ROE And 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.

Zhejiang Weixing New Building Materials' Earnings Growth And 25% 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 8.3% which is quite remarkable. Probably as a result of this, Zhejiang Weixing New Building Materials was able to see a decent net income growth of 8.3% over the last five years.

As a next step, we compared Zhejiang Weixing New Building Materials' 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 4.2%.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Zhejiang Weixing New Building Materials is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Weixing New Building Materials Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 73% (or a retention ratio of 27%) for Zhejiang Weixing New Building Materials suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Zhejiang Weixing New Building Materials has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its 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 26% for future ROE.

Summary

On the whole, we feel that Zhejiang Weixing New Building Materials' performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. 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.

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