Is Zhejiang Hengda New Material Co.,Ltd.'s (SZSE:301469) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Zhejiang Hengda New MaterialLtd's (SZSE:301469) stock increased significantly by 18% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Zhejiang Hengda New MaterialLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Zhejiang Hengda New MaterialLtd

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Zhejiang Hengda New MaterialLtd is:

5.2% = CN¥71m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 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. 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 Hengda New MaterialLtd's Earnings Growth And 5.2% ROE

When you first look at it, Zhejiang Hengda New MaterialLtd's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 5.4%, we may spare it some thought. Even so, Zhejiang Hengda New MaterialLtd has shown a fairly decent growth in its net income which grew at a rate of 9.5%. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Zhejiang Hengda New MaterialLtd compares quite favourably to the industry average, which shows a decline of 0.005% over the last few years.

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. 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 Zhejiang Hengda New MaterialLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Hengda New MaterialLtd Efficiently Re-investing Its Profits?

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

While Zhejiang Hengda New MaterialLtd has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

On the whole, we do feel that Zhejiang Hengda New MaterialLtd has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Zhejiang Hengda New MaterialLtd 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.