Zhejiang Daily Digital Culture Group Co.,Ltd's (SHSE:600633) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Zhejiang Daily Digital Culture GroupLtd's (SHSE:600633) stock is up by a considerable 35% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Zhejiang Daily Digital Culture GroupLtd'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Zhejiang Daily Digital Culture GroupLtd

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 Daily Digital Culture GroupLtd is:

1.5% = CN¥157m ÷ CN¥11b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.01 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Zhejiang Daily Digital Culture GroupLtd's Earnings Growth And 1.5% ROE

It is hard to argue that Zhejiang Daily Digital Culture GroupLtd's ROE is much good in and of itself. Not just that, even compared to the industry average of 5.1%, the company's ROE is entirely unremarkable. Thus, the low net income growth of 3.4% seen by Zhejiang Daily Digital Culture GroupLtd over the past five years could probably be the result of it having a lower ROE.

We then compared Zhejiang Daily Digital Culture GroupLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 0.3% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 600633 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Zhejiang Daily Digital Culture GroupLtd Using Its Retained Earnings Effectively?

Zhejiang Daily Digital Culture GroupLtd has a low three-year median payout ratio of 22% (meaning, the company keeps the remaining 78% of profits) which means that the company is retaining more of its earnings. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Zhejiang Daily Digital Culture GroupLtd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 35% over the next three years. Still, forecasts suggest that Zhejiang Daily Digital Culture GroupLtd's future ROE will rise to 6.9% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we feel that Zhejiang Daily Digital Culture GroupLtd certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.