Are Strong Financial Prospects The Force That Is Driving The Momentum In Zhejiang JIULI Hi-tech Metals Co.,Ltd's SZSE:002318) Stock?

Most readers would already be aware that Zhejiang JIULI Hi-tech MetalsLtd's (SZSE:002318) stock increased significantly by 33% 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 Zhejiang JIULI Hi-tech MetalsLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Zhejiang JIULI Hi-tech MetalsLtd

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Zhejiang JIULI Hi-tech MetalsLtd is:

19% = CN¥1.5b ÷ CN¥7.8b (Based on the trailing twelve months to September 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¥0.19 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Zhejiang JIULI Hi-tech MetalsLtd's Earnings Growth And 19% ROE

To start with, Zhejiang JIULI Hi-tech MetalsLtd's ROE looks acceptable. Especially when compared to the industry average of 7.5% the company's ROE looks pretty impressive. This certainly adds some context to Zhejiang JIULI Hi-tech MetalsLtd's exceptional 23% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Zhejiang JIULI Hi-tech MetalsLtd's growth is quite high when compared to the industry average growth of 9.8% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Zhejiang JIULI Hi-tech MetalsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang JIULI Hi-tech MetalsLtd Using Its Retained Earnings Effectively?

Zhejiang JIULI Hi-tech MetalsLtd's three-year median payout ratio is a pretty moderate 32%, meaning the company retains 68% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Zhejiang JIULI Hi-tech MetalsLtd is reinvesting its earnings efficiently.

Moreover, Zhejiang JIULI Hi-tech MetalsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 31%. As a result, Zhejiang JIULI Hi-tech MetalsLtd's ROE is not expected to change by much either, which we inferred from the analyst estimate of 18% for future ROE.

Summary

In total, we are pretty happy with Zhejiang JIULI Hi-tech MetalsLtd'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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.