Will Weakness in Zhejiang Hengwei Battery Co., Ltd.'s (SZSE:301222) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 16% over the past month, it is easy to disregard Zhejiang Hengwei Battery (SZSE:301222). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Zhejiang Hengwei Battery's ROE in this article.

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. 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 Hengwei Battery

How To Calculate Return On Equity?

Return on equity 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 Hengwei Battery is:

8.7% = CN¥120m ÷ CN¥1.4b (Based on the trailing twelve months to September 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¥0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Hengwei Battery's Earnings Growth And 8.7% ROE

At first glance, Zhejiang Hengwei Battery's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 6.4% which we definitely can't overlook. This certainly adds some context to Zhejiang Hengwei Battery's moderate 11% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing Zhejiang Hengwei Battery's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 10% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Zhejiang Hengwei Battery fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Hengwei Battery Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 32% (implying that the company retains 68% of its profits), it seems that Zhejiang Hengwei Battery is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Along with seeing a growth in earnings, Zhejiang Hengwei Battery only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

In total, we are pretty happy with Zhejiang Hengwei Battery's performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 2 risks we have identified for Zhejiang Hengwei Battery 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.