Are Zhejiang Natural Outdoor Goods Inc.'s (SHSE:605080) Mixed Financials Driving The Negative Sentiment?

With its stock down 13% over the past month, it is easy to disregard Zhejiang Natural Outdoor Goods (SHSE:605080). 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. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Zhejiang Natural Outdoor Goods' ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Zhejiang Natural Outdoor Goods

How To 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 Natural Outdoor Goods is:

5.3% = CN¥103m ÷ CN¥1.9b (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¥0.05.

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. 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.

Zhejiang Natural Outdoor Goods' Earnings Growth And 5.3% ROE

On the face of it, Zhejiang Natural Outdoor Goods' ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 7.7% either. As a result, Zhejiang Natural Outdoor Goods' flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

We then compared Zhejiang Natural Outdoor Goods' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.6% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. 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. What is 605080 worth today? The intrinsic value infographic in our free research report helps visualize whether 605080 is currently mispriced by the market.

Is Zhejiang Natural Outdoor Goods Efficiently Re-investing Its Profits?

Zhejiang Natural Outdoor Goods has a low three-year median payout ratio of 15% (or a retention ratio of 85%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Only recently, Zhejiang Natural Outdoor Goods started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Summary

Overall, we have mixed feelings about Zhejiang Natural Outdoor Goods. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.