Is Shaanxi Zhongtian Rocket Technology Co., Ltd's (SZSE:003009) Recent Price Movement Underpinned By Its Weak Fundamentals?

It is hard to get excited after looking at Shaanxi Zhongtian Rocket Technology's (SZSE:003009) recent performance, when its stock has declined 10% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Shaanxi Zhongtian Rocket Technology's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Shaanxi Zhongtian Rocket Technology

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Shaanxi Zhongtian Rocket Technology is:

4.7% = CN¥76m ÷ CN¥1.6b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Shaanxi Zhongtian Rocket Technology's Earnings Growth And 4.7% ROE

As you can see, Shaanxi Zhongtian Rocket Technology's ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 5.0%. Therefore, it might not be wrong to say that the five year net income decline of 6.0% seen by Shaanxi Zhongtian Rocket Technology was possibly a result of the disappointing ROE.

That being said, we compared Shaanxi Zhongtian Rocket Technology's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 10% in the same 5-year period.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shaanxi Zhongtian Rocket Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shaanxi Zhongtian Rocket Technology Making Efficient Use Of Its Profits?

Shaanxi Zhongtian Rocket Technology's low three-year median payout ratio of 10% (implying that it retains the remaining 90% of its profits) comes as a surprise when you pair it with the shrinking earnings. This typically shouldn't be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

Additionally, Shaanxi Zhongtian Rocket Technology has paid dividends over a period of three years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Conclusion

Overall, we have mixed feelings about Shaanxi Zhongtian Rocket Technology. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Shaanxi Zhongtian Rocket Technology.

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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.