Declining Stock and Solid Fundamentals: Is The Market Wrong About Hongmian Zhihui Science and Technology Innovation Co.,Ltd.Guangzhou (SZSE:000523)?

Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou (SZSE:000523) has had a rough month with its share price down 14%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. 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 Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou

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 Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou is:

7.3% = CN¥116m ÷ CN¥1.6b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's Earnings Growth And 7.3% ROE

When you first look at it, Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 6.0% doesn't go unnoticed by us. This certainly adds some context to Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's moderate 20% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou compares quite favourably to the industry average, which shows a decline of 3.1% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou Using Its Retained Earnings Effectively?

Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number that we discussed above.

Conclusion

On the whole, we feel that Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 1 risk we have identified for Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou visit our risks dashboard for free.

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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.