Does Zhuzhou Tianqiao Crane Co., Ltd.'s (SZSE:002523) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Zhuzhou Tianqiao Crane's (SZSE:002523) stock is up by a considerable 18% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on Zhuzhou Tianqiao Crane's ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Zhuzhou Tianqiao Crane

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 Zhuzhou Tianqiao Crane is:

2.4% = CN¥57m ÷ CN¥2.4b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.02 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. 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. 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 Zhuzhou Tianqiao Crane's Earnings Growth And 2.4% ROE

As you can see, Zhuzhou Tianqiao Crane's ROE looks pretty weak. Even compared to the average industry ROE of 7.0%, the company's ROE is quite dismal. For this reason, Zhuzhou Tianqiao Crane's five year net income decline of 19% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared Zhuzhou Tianqiao Crane's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 8.8% over the last few years.

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. Is Zhuzhou Tianqiao Crane fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhuzhou Tianqiao Crane Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 52% (implying that 48% of the profits are retained), most of Zhuzhou Tianqiao Crane's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 2 risks we have identified for Zhuzhou Tianqiao Crane visit our risks dashboard for free.

Additionally, Zhuzhou Tianqiao Crane has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

On the whole, Zhuzhou Tianqiao Crane's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Zhuzhou Tianqiao Crane's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.