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Zhejiang Zhongjian Technology Co.,Ltd's (SZSE:002779) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?
Most readers would already be aware that Zhejiang Zhongjian TechnologyLtd's (SZSE:002779) stock increased significantly by 95% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Zhejiang Zhongjian TechnologyLtd's ROE today.
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 Zhongjian TechnologyLtd
How Is ROE Calculated?
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 Zhongjian TechnologyLtd is:
5.2% = CN¥38m ÷ CN¥720m (Based on the trailing twelve months to September 2024).
The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Zhejiang Zhongjian TechnologyLtd's Earnings Growth And 5.2% ROE
When you first look at it, Zhejiang Zhongjian TechnologyLtd's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 9.9% either. In spite of this, Zhejiang Zhongjian TechnologyLtd was able to grow its net income considerably, at a rate of 52% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Zhejiang Zhongjian TechnologyLtd's growth is quite high when compared to the industry average growth of 8.8% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Zhejiang Zhongjian TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Zhejiang Zhongjian TechnologyLtd Efficiently Re-investing Its Profits?
Zhejiang Zhongjian TechnologyLtd's ' three-year median payout ratio is on the lower side at 17% implying that it is retaining a higher percentage (83%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Additionally, Zhejiang Zhongjian TechnologyLtd has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders.
Summary
Overall, we feel that Zhejiang Zhongjian TechnologyLtd certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Zhejiang Zhongjian TechnologyLtd visit our risks dashboard for free.
Valuation is complex, but we're here to simplify it.
Discover if Zhejiang Zhongjian TechnologyLtd 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.
About SZSE:002779
Zhejiang Zhongjian TechnologyLtd
Engages in the research and development, production, and sale of various garden machinery products in China and internationally.
Flawless balance sheet with questionable track record.