Are Zhangjiagang Haiguo New Energy Equipment Manufacturing Co., Ltd.'s (SZSE:301063) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 18% over the past month, it is easy to disregard Zhangjiagang Haiguo New Energy Equipment Manufacturing (SZSE:301063). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Zhangjiagang Haiguo New Energy Equipment Manufacturing's ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Zhangjiagang Haiguo New Energy Equipment Manufacturing

How Do You 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 Zhangjiagang Haiguo New Energy Equipment Manufacturing is:

1.2% = CN¥19m ÷ CN¥1.5b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.01 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.

Zhangjiagang Haiguo New Energy Equipment Manufacturing's Earnings Growth And 1.2% ROE

As you can see, Zhangjiagang Haiguo New Energy Equipment Manufacturing's ROE looks pretty weak. Not just that, even compared to the industry average of 7.5%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 16% seen by Zhangjiagang Haiguo New Energy Equipment Manufacturing was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

So, as a next step, we compared Zhangjiagang Haiguo New Energy Equipment Manufacturing's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 9.8% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Zhangjiagang Haiguo New Energy Equipment Manufacturing is trading on a high P/E or a low P/E, relative to its industry.

Is Zhangjiagang Haiguo New Energy Equipment Manufacturing Using Its Retained Earnings Effectively?

Zhangjiagang Haiguo New Energy Equipment Manufacturing's low three-year median payout ratio of 15% (or a retention ratio of 85%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company's earnings have actually shrunk. This typically shouldn't be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

Additionally, Zhangjiagang Haiguo New Energy Equipment Manufacturing started paying a dividend only recently. So it looks like the management may have perceived that shareholders favor dividends even though earnings have been in decline.

Conclusion

Overall, we have mixed feelings about Zhangjiagang Haiguo New Energy Equipment Manufacturing. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 4 risks we have identified for Zhangjiagang Haiguo New Energy Equipment Manufacturing visit our risks dashboard for free.

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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.