Is Hangzhou Juheshun New Material Co.,LTD's (SHSE:605166) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that Hangzhou Juheshun New MaterialLTD's (SHSE:605166) stock increased significantly by 12% 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. In this article, we decided to focus on Hangzhou Juheshun New MaterialLTD'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Hangzhou Juheshun New MaterialLTD

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 Hangzhou Juheshun New MaterialLTD is:

12% = CN¥247m ÷ CN¥2.0b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 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. 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.

Hangzhou Juheshun New MaterialLTD's Earnings Growth And 12% ROE

To begin with, Hangzhou Juheshun New MaterialLTD seems to have a respectable ROE. On comparing with the average industry ROE of 6.4% the company's ROE looks pretty remarkable. Probably as a result of this, Hangzhou Juheshun New MaterialLTD was able to see a decent growth of 17% over the last five years.

As a next step, we compared Hangzhou Juheshun New MaterialLTD's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.8%.

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. Is Hangzhou Juheshun New MaterialLTD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hangzhou Juheshun New MaterialLTD Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 27% (implying that the company retains 73% of its profits), it seems that Hangzhou Juheshun New MaterialLTD is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Hangzhou Juheshun New MaterialLTD is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 46% over the next three years. However, Hangzhou Juheshun New MaterialLTD's future ROE is expected to rise to 18% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Summary

On the whole, we feel that Hangzhou Juheshun New MaterialLTD'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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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