Declining Stock and Solid Fundamentals: Is The Market Wrong About Zhejiang Cfmoto Power Co.,Ltd (SHSE:603129)?

It is hard to get excited after looking at Zhejiang Cfmoto PowerLtd's (SHSE:603129) recent performance, when its stock has declined 5.0% over the past week. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Zhejiang Cfmoto PowerLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Zhejiang Cfmoto PowerLtd

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 Cfmoto PowerLtd is:

21% = CN¥1.1b ÷ CN¥5.4b (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¥0.21.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Zhejiang Cfmoto PowerLtd's Earnings Growth And 21% ROE

To begin with, Zhejiang Cfmoto PowerLtd seems to have a respectable ROE. On comparing with the average industry ROE of 7.8% the company's ROE looks pretty remarkable. This certainly adds some context to Zhejiang Cfmoto PowerLtd's exceptional 38% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Zhejiang Cfmoto PowerLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.0%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Cfmoto PowerLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Cfmoto PowerLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Zhejiang Cfmoto PowerLtd is 27%, which is moderately low. The company is retaining the remaining 73%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Zhejiang Cfmoto PowerLtd is reinvesting its earnings efficiently.

Moreover, Zhejiang Cfmoto PowerLtd is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Conclusion

In total, we are pretty happy with Zhejiang Cfmoto PowerLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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

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