Is Weakness In Zhejiang Meorient Commerce Exhibition Inc. (SZSE:300795) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 22% over the past three months, it is easy to disregard Zhejiang Meorient Commerce Exhibition (SZSE:300795). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Zhejiang Meorient Commerce Exhibition'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.

View our latest analysis for Zhejiang Meorient Commerce Exhibition

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 Zhejiang Meorient Commerce Exhibition is:

29% = CN¥201m ÷ CN¥684m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax 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¥0.29.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Zhejiang Meorient Commerce Exhibition's Earnings Growth And 29% ROE

To begin with, Zhejiang Meorient Commerce Exhibition has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 4.9% also doesn't go unnoticed by us. Under the circumstances, Zhejiang Meorient Commerce Exhibition's considerable five year net income growth of 29% was to be expected.

Next, on comparing with the industry net income growth, we found that Zhejiang Meorient Commerce Exhibition's growth is quite high when compared to the industry average growth of 1.7% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Zhejiang Meorient Commerce Exhibition fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Meorient Commerce Exhibition Using Its Retained Earnings Effectively?

Zhejiang Meorient Commerce Exhibition's three-year median payout ratio is a pretty moderate 40%, meaning the company retains 60% of its income. So it seems that Zhejiang Meorient Commerce Exhibition is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Zhejiang Meorient Commerce Exhibition is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 36% of its profits over the next three years. As a result, Zhejiang Meorient Commerce Exhibition's ROE is not expected to change by much either, which we inferred from the analyst estimate of 31% for future ROE.

Conclusion

Overall, we are quite pleased with Zhejiang Meorient Commerce Exhibition's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.