Are Robust Financials Driving The Recent Rally In Hubei Zhenhua Chemical Co.,Ltd.'s (SHSE:603067) Stock?

Hubei Zhenhua ChemicalLtd's (SHSE:603067) stock is up by a considerable 7.4% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Hubei Zhenhua ChemicalLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Hubei Zhenhua ChemicalLtd

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Hubei Zhenhua ChemicalLtd is:

14% = CN¥446m ÷ CN¥3.1b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Hubei Zhenhua ChemicalLtd's Earnings Growth And 14% ROE

To begin with, Hubei Zhenhua ChemicalLtd seems to have a respectable ROE. Especially when compared to the industry average of 6.3% the company's ROE looks pretty impressive. Probably as a result of this, Hubei Zhenhua ChemicalLtd was able to see an impressive net income growth of 24% over the last five years. However, there could also be other causes behind this 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 Hubei Zhenhua ChemicalLtd's growth is quite high when compared to the industry average growth of 5.0% 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. If you're wondering about Hubei Zhenhua ChemicalLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hubei Zhenhua ChemicalLtd Efficiently Re-investing Its Profits?

Hubei Zhenhua ChemicalLtd's three-year median payout ratio to shareholders is 25%, which is quite low. This implies that the company is retaining 75% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Hubei Zhenhua ChemicalLtd has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Hubei Zhenhua ChemicalLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.