Has Zhejiang Jiahua Energy Chemical Industry Co.,Ltd.'s (SHSE:600273) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Zhejiang Jiahua Energy Chemical IndustryLtd (SHSE:600273) has had a great run on the share market with its stock up by a significant 14% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Zhejiang Jiahua Energy Chemical IndustryLtd's ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Zhejiang Jiahua Energy Chemical IndustryLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Zhejiang Jiahua Energy Chemical IndustryLtd is:

11% = CN¥1.1b ÷ CN¥10.0b (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¥0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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 Jiahua Energy Chemical IndustryLtd's Earnings Growth And 11% ROE

On the face of it, Zhejiang Jiahua Energy Chemical IndustryLtd's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 6.2% which we definitely can't overlook. Having said that, Zhejiang Jiahua Energy Chemical IndustryLtd's net income growth over the past five years is more or less flat. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the flat earnings growth.

As a next step, we compared Zhejiang Jiahua Energy Chemical IndustryLtd's net income growth with the industry and discovered that the industry saw an average growth of 4.9% in the same period.

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. 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 Jiahua Energy Chemical IndustryLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Jiahua Energy Chemical IndustryLtd Efficiently Re-investing Its Profits?

In spite of a normal three-year median payout ratio of 48% (or a retention ratio of 52%), Zhejiang Jiahua Energy Chemical IndustryLtd hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Zhejiang Jiahua Energy Chemical IndustryLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, it does look like Zhejiang Jiahua Energy Chemical IndustryLtd has some positive aspects to its business. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Zhejiang Jiahua Energy Chemical IndustryLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.