Is Zhenjiang Dongfang Electric Heating Technology Co.,Ltd's (SZSE:300217) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Zhenjiang Dongfang Electric Heating TechnologyLtd's (SZSE:300217) stock is up by a considerable 49% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Zhenjiang Dongfang Electric Heating TechnologyLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Zhenjiang Dongfang Electric Heating TechnologyLtd

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 Zhenjiang Dongfang Electric Heating TechnologyLtd is:

8.3% = CN¥340m ÷ CN¥4.1b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.08 in profit.

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 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 Zhenjiang Dongfang Electric Heating TechnologyLtd's Earnings Growth And 8.3% ROE

When you first look at it, Zhenjiang Dongfang Electric Heating TechnologyLtd's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 9.3%, so we won't completely dismiss the company. Particularly, the exceptional 56% net income growth seen by Zhenjiang Dongfang Electric Heating TechnologyLtd over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's 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.

We then compared Zhenjiang Dongfang Electric Heating TechnologyLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 8.1% in the same 5-year period.

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). 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 Zhenjiang Dongfang Electric Heating TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Zhenjiang Dongfang Electric Heating TechnologyLtd Using Its Retained Earnings Effectively?

Zhenjiang Dongfang Electric Heating TechnologyLtd has a really low three-year median payout ratio of 13%, meaning that it has the remaining 87% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, Zhenjiang Dongfang Electric Heating TechnologyLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, it does look like Zhenjiang Dongfang Electric Heating TechnologyLtd has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.