Are Strong Financial Prospects The Force That Is Driving The Momentum In Zhejiang Sunoren Solar Technology Co.,Ltd.'s SHSE:603105) Stock?

Zhejiang Sunoren Solar TechnologyLtd (SHSE:603105) has had a great run on the share market with its stock up by a significant 8.4% over the last week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Zhejiang Sunoren Solar TechnologyLtd's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Zhejiang Sunoren Solar TechnologyLtd

How To 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 Sunoren Solar TechnologyLtd is:

10% = CN¥220m ÷ CN¥2.2b (Based on the trailing twelve months to September 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¥0.10.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Sunoren Solar TechnologyLtd's Earnings Growth And 10% ROE

At first glance, Zhejiang Sunoren Solar TechnologyLtd's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 6.4%, is definitely interesting. Especially when you consider Zhejiang Sunoren Solar TechnologyLtd's exceptional 31% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

We then compared Zhejiang Sunoren Solar TechnologyLtd'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 14% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Zhejiang Sunoren Solar TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Sunoren Solar TechnologyLtd Using Its Retained Earnings Effectively?

Zhejiang Sunoren Solar TechnologyLtd's three-year median payout ratio is a pretty moderate 32%, meaning the company retains 68% of its income. By the looks of it, the dividend is well covered and Zhejiang Sunoren Solar TechnologyLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Zhejiang Sunoren Solar TechnologyLtd has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we feel that Zhejiang Sunoren Solar TechnologyLtd's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.