Declining Stock and Solid Fundamentals: Is The Market Wrong About Hangzhou Oxygen Plant Group Co.,Ltd. (SZSE:002430)?

With its stock down 34% over the past three months, it is easy to disregard Hangzhou Oxygen Plant GroupLtd (SZSE:002430). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Hangzhou Oxygen Plant GroupLtd's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Hangzhou Oxygen Plant GroupLtd

How Is ROE Calculated?

ROE 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 Hangzhou Oxygen Plant GroupLtd is:

12% = CN¥1.2b ÷ CN¥10b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made 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. 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. 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 Hangzhou Oxygen Plant GroupLtd's Earnings Growth And 12% ROE

To start with, Hangzhou Oxygen Plant GroupLtd's ROE looks acceptable. On comparing with the average industry ROE of 6.5% the company's ROE looks pretty remarkable. This probably laid the ground for Hangzhou Oxygen Plant GroupLtd's moderate 11% net income growth seen over the past five years.

As a next step, we compared Hangzhou Oxygen Plant GroupLtd'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 7.9%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is 002430 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Hangzhou Oxygen Plant GroupLtd Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 48% (implying that the company retains 52% of its profits), it seems that Hangzhou Oxygen Plant GroupLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Hangzhou Oxygen Plant GroupLtd 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 41%. Regardless, the future ROE for Hangzhou Oxygen Plant GroupLtd is predicted to rise to 17% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we are quite pleased with Hangzhou Oxygen Plant GroupLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.