Is Hubei Zhenhua Chemical Co.,Ltd.'s (SHSE:603067) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that Hubei Zhenhua ChemicalLtd's (SHSE:603067) stock increased significantly by 23% over the past three months. 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. Specifically, we decided to study Hubei Zhenhua ChemicalLtd's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out 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:

12% = CN¥359m ÷ CN¥2.9b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 Hubei Zhenhua ChemicalLtd's Earnings Growth And 12% ROE

To begin with, Hubei Zhenhua ChemicalLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.3%. This probably laid the ground for Hubei Zhenhua ChemicalLtd's significant 26% net income growth seen over the past five years. We believe that there might also 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 Hubei Zhenhua ChemicalLtd's growth is quite high when compared to the industry average growth of 7.8% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Hubei Zhenhua ChemicalLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hubei Zhenhua ChemicalLtd Efficiently Re-investing Its Profits?

Hubei Zhenhua ChemicalLtd has a really low three-year median payout ratio of 25%, meaning that it has the remaining 75% left over to reinvest into its business. So it looks like Hubei Zhenhua ChemicalLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Hubei Zhenhua ChemicalLtd is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Summary

Overall, we are quite pleased with Hubei Zhenhua ChemicalLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com