Is Shandong Zhangqiu Blower Co., Ltd's (SZSE:002598) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Shandong Zhangqiu Blower's (SZSE:002598) stock increased significantly by 38% 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. Particularly, we will be paying attention to Shandong Zhangqiu Blower's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Shandong Zhangqiu Blower

How Is ROE Calculated?

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 Shandong Zhangqiu Blower is:

8.7% = CN¥118m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Shandong Zhangqiu Blower's Earnings Growth And 8.7% ROE

When you first look at it, Shandong Zhangqiu Blower's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 6.3% which we definitely can't overlook. This probably goes some way in explaining Shandong Zhangqiu Blower's moderate 7.4% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing Shandong Zhangqiu Blower's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.3% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Shandong Zhangqiu Blower fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shandong Zhangqiu Blower Making Efficient Use Of Its Profits?

Shandong Zhangqiu Blower has a healthy combination of a moderate three-year median payout ratio of 29% (or a retention ratio of 71%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, Shandong Zhangqiu Blower 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 Shandong Zhangqiu Blower's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard will have the 1 risk we have identified for Shandong Zhangqiu Blower.

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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.