Can Zhejiang Meishuo Electric Technology Co.,Ltd's (SZSE:301295) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Zhejiang Meishuo Electric TechnologyLtd (SZSE:301295) has had a great run on the share market with its stock up by a significant 11% over the last week. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Zhejiang Meishuo Electric TechnologyLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Zhejiang Meishuo Electric TechnologyLtd

How To Calculate Return On Equity?

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 Meishuo Electric TechnologyLtd is:

4.1% = CN¥40m ÷ CN¥975m (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 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. 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 Meishuo Electric TechnologyLtd's Earnings Growth And 4.1% ROE

It is quite clear that Zhejiang Meishuo Electric TechnologyLtd's ROE is rather low. Even when compared to the industry average of 6.9%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to Zhejiang Meishuo Electric TechnologyLtd's very little net income growth of 3.0% over the past five years.

Next, on comparing with the industry net income growth, we found that Zhejiang Meishuo Electric TechnologyLtd's reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. 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. Is Zhejiang Meishuo Electric TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Meishuo Electric TechnologyLtd Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 78% (or a retention ratio of 22%), most of Zhejiang Meishuo Electric TechnologyLtd's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Summary

Overall, we would be extremely cautious before making any decision on Zhejiang Meishuo Electric TechnologyLtd. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. You can see the 3 risks we have identified for Zhejiang Meishuo Electric TechnologyLtd by visiting our risks dashboard for free on our platform here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com