Is Weakness In Zhejiang Xinhua Chemical Co.,Ltd (SHSE:603867) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 11% over the past month, it is easy to disregard Zhejiang Xinhua ChemicalLtd (SHSE:603867). 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 Zhejiang Xinhua ChemicalLtd'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Zhejiang Xinhua ChemicalLtd

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Zhejiang Xinhua ChemicalLtd is:

11% = CN¥270m ÷ CN¥2.5b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Zhejiang Xinhua ChemicalLtd's Earnings Growth And 11% ROE

At first glance, Zhejiang Xinhua ChemicalLtd seems to have a decent ROE. On comparing with the average industry ROE of 6.2% the company's ROE looks pretty remarkable. This probably laid the ground for Zhejiang Xinhua ChemicalLtd's moderate 14% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Zhejiang Xinhua ChemicalLtd's growth is quite high when compared to the industry average growth of 4.9% in the same period, which is great to see.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is Zhejiang Xinhua ChemicalLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Xinhua ChemicalLtd Making Efficient Use Of Its Profits?

Zhejiang Xinhua ChemicalLtd has a healthy combination of a moderate three-year median payout ratio of 33% (or a retention ratio of 67%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Zhejiang Xinhua ChemicalLtd has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Zhejiang Xinhua ChemicalLtd's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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. Our risks dashboard will have the 1 risk we have identified for Zhejiang Xinhua ChemicalLtd.

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

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.