Stock Analysis

Zhongxing Shenyang Commercial Building Group Co.,Ltd's (SZSE:000715) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

SZSE:000715
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With its stock down 14% over the past month, it is easy to disregard Zhongxing Shenyang Commercial Building GroupLtd (SZSE:000715). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Zhongxing Shenyang Commercial Building GroupLtd's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Zhongxing Shenyang Commercial Building GroupLtd

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 Zhongxing Shenyang Commercial Building GroupLtd is:

5.8% = CN¥110m ÷ CN¥1.9b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.06 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. 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.

Zhongxing Shenyang Commercial Building GroupLtd's Earnings Growth And 5.8% ROE

On the face of it, Zhongxing Shenyang Commercial Building GroupLtd's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 3.7% which we definitely can't overlook. However, Zhongxing Shenyang Commercial Building GroupLtd has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the flat earnings growth.

We then compared Zhongxing Shenyang Commercial Building GroupLtd's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 14% in the same 5-year period. This does offer shareholders some relief

past-earnings-growth
SZSE:000715 Past Earnings Growth January 7th 2025

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. 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 Zhongxing Shenyang Commercial Building GroupLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Zhongxing Shenyang Commercial Building GroupLtd Using Its Retained Earnings Effectively?

Zhongxing Shenyang Commercial Building GroupLtd has a low three-year median payout ratio of 17% (or a retention ratio of 83%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Additionally, Zhongxing Shenyang Commercial Building 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.

Summary

Overall, we feel that Zhongxing Shenyang Commercial Building GroupLtd certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Moreover, after studying current analyst estimates, we discovered that the company's earnings are expected to continue to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Valuation is complex, but we're here to simplify it.

Discover if Zhongxing Shenyang Commercial Building GroupLtd might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.