Stock Analysis

Zhejiang Hongchang Electrical Technology Co., Ltd.'s (SZSE:301008) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

SZSE:301008
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Zhejiang Hongchang Electrical Technology (SZSE:301008) has had a great run on the share market with its stock up by a significant 13% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Zhejiang Hongchang Electrical Technology's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Zhejiang Hongchang Electrical Technology

How Do You 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 Zhejiang Hongchang Electrical Technology is:

8.1% = CN¥92m ÷ CN¥1.1b (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¥0.08 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. 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. 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 Zhejiang Hongchang Electrical Technology's Earnings Growth And 8.1% ROE

On the face of it, Zhejiang Hongchang Electrical Technology's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.9%. Having said that, Zhejiang Hongchang Electrical Technology's net income growth over the past five years is more or less flat. Remember, the company's ROE is not particularly great to begin with. So that could also be one of the reasons behind the company's flat growth in earnings.

As a next step, we compared Zhejiang Hongchang Electrical Technology's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 12% in the same period.

past-earnings-growth
SZSE:301008 Past Earnings Growth June 13th 2024

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Zhejiang Hongchang Electrical Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Hongchang Electrical Technology Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 47% (meaning the company retains53% of profits) in the last three-year period, Zhejiang Hongchang Electrical Technology's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Zhejiang Hongchang Electrical Technology has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, we feel that the performance shown by Zhejiang Hongchang Electrical Technology can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Zhejiang Hongchang Electrical Technology and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Valuation is complex, but we're here to simplify it.

Discover if Zhejiang Hongchang Electrical Technology might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.