TCL Zhonghuan Renewable Energy Technology Co.,Ltd. (SZSE:002129) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

It is hard to get excited after looking at TCL Zhonghuan Renewable Energy TechnologyLtd's (SZSE:002129) recent performance, when its stock has declined 22% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on TCL Zhonghuan Renewable Energy TechnologyLtd'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 TCL Zhonghuan Renewable Energy TechnologyLtd

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for TCL Zhonghuan Renewable Energy TechnologyLtd is:

0.8% = CN¥483m ÷ CN¥59b (Based on the trailing twelve months to March 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¥0.01 in profit.

What Has ROE Got To Do With 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. 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.

A Side By Side comparison of TCL Zhonghuan Renewable Energy TechnologyLtd's Earnings Growth And 0.8% ROE

It is quite clear that TCL Zhonghuan Renewable Energy TechnologyLtd's ROE is rather low. Not just that, even compared to the industry average of 5.8%, the company's ROE is entirely unremarkable. In spite of this, TCL Zhonghuan Renewable Energy TechnologyLtd was able to grow its net income considerably, at a rate of 38% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared TCL Zhonghuan Renewable Energy 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 20% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about TCL Zhonghuan Renewable Energy TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is TCL Zhonghuan Renewable Energy TechnologyLtd Using Its Retained Earnings Effectively?

TCL Zhonghuan Renewable Energy TechnologyLtd's ' three-year median payout ratio is on the lower side at 6.4% implying that it is retaining a higher percentage (94%) of its profits. So it looks like TCL Zhonghuan Renewable Energy TechnologyLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, TCL Zhonghuan Renewable Energy TechnologyLtd is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 16% over the next three years. Still, forecasts suggest that TCL Zhonghuan Renewable Energy TechnologyLtd's future ROE will rise to 8.0% 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

On the whole, we do feel that TCL Zhonghuan Renewable Energy TechnologyLtd has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com