Zhejiang Yilida Ventilator Co.,Ltd.'s (SZSE:002686) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Zhejiang Yilida VentilatorLtd (SZSE:002686) has had a rough week with its share price down 10%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Zhejiang Yilida VentilatorLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Zhejiang Yilida VentilatorLtd

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Zhejiang Yilida VentilatorLtd is:

0.8% = CN¥14m ÷ CN¥1.8b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.01 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. 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.

Zhejiang Yilida VentilatorLtd's Earnings Growth And 0.8% ROE

It is quite clear that Zhejiang Yilida VentilatorLtd's ROE is rather low. Not just that, even compared to the industry average of 7.5%, the company's ROE is entirely unremarkable. In spite of this, Zhejiang Yilida VentilatorLtd was able to grow its net income considerably, at a rate of 67% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Zhejiang Yilida VentilatorLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 3.5% in the same 5-year period.

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 Zhejiang Yilida VentilatorLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Yilida VentilatorLtd Using Its Retained Earnings Effectively?

Zhejiang Yilida VentilatorLtd's three-year median payout ratio is a pretty moderate 30%, meaning the company retains 70% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Zhejiang Yilida VentilatorLtd is reinvesting its earnings efficiently.

Besides, Zhejiang Yilida VentilatorLtd 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 feel that Zhejiang Yilida VentilatorLtd certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Zhejiang Yilida VentilatorLtd visit our risks dashboard for free.

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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.