Is Zhejiang Jingsheng Mechanical & Electrical Co., Ltd.'s (SZSE:300316) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Zhejiang Jingsheng Mechanical & Electrical's (SZSE:300316) stock increased significantly by 5.2% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Zhejiang Jingsheng Mechanical & Electrical's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Zhejiang Jingsheng Mechanical & Electrical

How Do You 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 Jingsheng Mechanical & Electrical is:

24% = CN¥4.4b ÷ CN¥18b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.24 in profit.

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. 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.

Zhejiang Jingsheng Mechanical & Electrical's Earnings Growth And 24% ROE

First thing first, we like that Zhejiang Jingsheng Mechanical & Electrical has an impressive ROE. Secondly, even when compared to the industry average of 6.5% the company's ROE is quite impressive. As a result, Zhejiang Jingsheng Mechanical & Electrical's exceptional 41% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that Zhejiang Jingsheng Mechanical & Electrical's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

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). Doing so will help them establish if the stock's future looks promising or ominous. What is 300316 worth today? The intrinsic value infographic in our free research report helps visualize whether 300316 is currently mispriced by the market.

Is Zhejiang Jingsheng Mechanical & Electrical Efficiently Re-investing Its Profits?

Zhejiang Jingsheng Mechanical & Electrical's ' three-year median payout ratio is on the lower side at 19% implying that it is retaining a higher percentage (81%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Zhejiang Jingsheng Mechanical & Electrical is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 26% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 18%, over the same period.

Conclusion

Overall, we are quite pleased with Zhejiang Jingsheng Mechanical & Electrical's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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

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.