Will Weakness in Zhejiang JIULI Hi-tech Metals Co.,Ltd's (SZSE:002318) Stock Prove Temporary Given Strong Fundamentals?

Zhejiang JIULI Hi-tech MetalsLtd (SZSE:002318) has had a rough month with its share price down 7.8%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Zhejiang JIULI Hi-tech MetalsLtd's ROE in this article.

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.

See our latest analysis for Zhejiang JIULI Hi-tech MetalsLtd

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 JIULI Hi-tech MetalsLtd is:

21% = CN¥1.6b ÷ CN¥7.6b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.21 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Zhejiang JIULI Hi-tech MetalsLtd's Earnings Growth And 21% ROE

At first glance, Zhejiang JIULI Hi-tech MetalsLtd seems to have a decent ROE. Especially when compared to the industry average of 7.4% the company's ROE looks pretty impressive. Probably as a result of this, Zhejiang JIULI Hi-tech MetalsLtd was able to see an impressive net income growth of 28% over the last five years. However, there could also be other causes behind this 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.

As a next step, we compared Zhejiang JIULI Hi-tech MetalsLtd'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 12%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. 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 36%, meaning the company retains 64% of its income. So it seems that Zhejiang JIULI Hi-tech MetalsLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Zhejiang JIULI Hi-tech MetalsLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 31% of its profits over the next three years. Accordingly, forecasts suggest that Zhejiang JIULI Hi-tech MetalsLtd's future ROE will be 18% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased 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. 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