Hangzhou Huawang New Material Technology Co.,Ltd.'s (SHSE:605377) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 9.4% over the past three months, it is easy to disregard Hangzhou Huawang New Material TechnologyLtd (SHSE:605377). 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. In this article, we decided to focus on Hangzhou Huawang New Material TechnologyLtd's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Hangzhou Huawang New Material TechnologyLtd

How To 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 Hangzhou Huawang New Material TechnologyLtd is:

16% = CN¥632m ÷ CN¥4.0b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.16 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.

Hangzhou Huawang New Material TechnologyLtd's Earnings Growth And 16% ROE

At first glance, Hangzhou Huawang New Material TechnologyLtd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 5.7%. Probably as a result of this, Hangzhou Huawang New Material TechnologyLtd 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 instance, the company has a low payout ratio or is being managed efficiently.

We then compared Hangzhou Huawang New Material TechnologyLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 0.2% in the same 5-year period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Hangzhou Huawang New Material TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hangzhou Huawang New Material TechnologyLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Hangzhou Huawang New Material TechnologyLtd is 35%, which is moderately low. The company is retaining the remaining 65%. By the looks of it, the dividend is well covered and Hangzhou Huawang New Material TechnologyLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Hangzhou Huawang New Material TechnologyLtd has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 70% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

In total, we are pretty happy with Hangzhou Huawang New Material TechnologyLtd's performance. 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, 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.