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 month with its share price down 21%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Zhejiang Yilida VentilatorLtd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out 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:

1.7% = CN¥29m ÷ CN¥1.7b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.02.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Zhejiang Yilida VentilatorLtd's Earnings Growth And 1.7% ROE

It is hard to argue that Zhejiang Yilida VentilatorLtd's ROE is much good in and of itself. Not just that, even compared to the industry average of 8.3%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Zhejiang Yilida VentilatorLtd saw an exceptional 55% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Zhejiang Yilida VentilatorLtd's growth is quite high when compared to the industry average growth of 4.2% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. 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 Yilida VentilatorLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Yilida VentilatorLtd Making Efficient Use Of Its Profits?

Zhejiang Yilida VentilatorLtd has a three-year median payout ratio of 29% (where it is retaining 71% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Zhejiang Yilida VentilatorLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Zhejiang Yilida VentilatorLtd 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.

Conclusion

On the whole, we do feel that Zhejiang Yilida VentilatorLtd has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings.

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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.