Zhejiang Zhongke Magnetic Industry Co., Ltd.'s (SZSE:301141) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Zhejiang Zhongke Magnetic Industry's (SZSE:301141) stock is up by a considerable 22% over the past week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Zhejiang Zhongke Magnetic Industry's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Zhejiang Zhongke Magnetic Industry

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 Zhongke Magnetic Industry is:

3.1% = CN¥39m ÷ CN¥1.3b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.03.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Zhejiang Zhongke Magnetic Industry's Earnings Growth And 3.1% ROE

As you can see, Zhejiang Zhongke Magnetic Industry's ROE looks pretty weak. Even compared to the average industry ROE of 7.4%, the company's ROE is quite dismal. Therefore, Zhejiang Zhongke Magnetic Industry's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Zhejiang Zhongke Magnetic Industry's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Zhejiang Zhongke Magnetic Industry fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Zhongke Magnetic Industry Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 31% (meaning the company retains69% of profits) in the last three-year period, Zhejiang Zhongke Magnetic Industry's earnings growth was more or les flat. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Zhejiang Zhongke Magnetic Industry started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Summary

Overall, we have mixed feelings about Zhejiang Zhongke Magnetic Industry. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Zhejiang Zhongke Magnetic Industry and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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