Zhengyuan Zhihui Group Co.,Ltd. (SZSE:300645) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

With its stock down 29% over the past three months, it is easy to disregard Zhengyuan Zhihui GroupLtd (SZSE:300645). 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. Specifically, we decided to study Zhengyuan Zhihui GroupLtd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Zhengyuan Zhihui GroupLtd

How Do You Calculate Return On Equity?

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 Zhengyuan Zhihui GroupLtd is:

4.9% = CN¥64m ÷ CN¥1.3b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Zhengyuan Zhihui GroupLtd's Earnings Growth And 4.9% ROE

As you can see, Zhengyuan Zhihui GroupLtd's ROE looks pretty weak. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 5.2%. However, the modest 10% net income growth seen by Zhengyuan Zhihui GroupLtd over the past five years is a positive sign. Given the low ROE, it is likely that there could be some other aspects that are driving this growth as well. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Zhengyuan Zhihui GroupLtd's growth is quite high when compared to the industry average growth of 3.7% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Zhengyuan Zhihui GroupLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhengyuan Zhihui GroupLtd Efficiently Re-investing Its Profits?

In Zhengyuan Zhihui GroupLtd's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 10% (or a retention ratio of 90%), which suggests that the company is investing most of its profits to grow its business.

Besides, Zhengyuan Zhihui GroupLtd has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Zhengyuan Zhihui GroupLtd has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Zhengyuan Zhihui GroupLtd visit our risks dashboard for free.

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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.