Zhuhai Huajin Capital Co., Ltd. (SZSE:000532) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Most readers would already be aware that Zhuhai Huajin Capital's (SZSE:000532) stock increased significantly by 30% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Zhuhai Huajin Capital'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Zhuhai Huajin Capital

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Zhuhai Huajin Capital is:

5.2% = CN¥74m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 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 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.

Zhuhai Huajin Capital's Earnings Growth And 5.2% ROE

When you first look at it, Zhuhai Huajin Capital's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 6.2%, we may spare it some thought. Having said that, Zhuhai Huajin Capital's net income growth over the past five years is more or less flat. Bear in mind, the company's ROE is not very high. So that could also be one of the reasons behind the company's flat growth in earnings.

We then compared Zhuhai Huajin Capital's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 3.9% in the same 5-year period, which is a bit concerning.

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. Is Zhuhai Huajin Capital fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhuhai Huajin Capital Making Efficient Use Of Its Profits?

Zhuhai Huajin Capital's low three-year median payout ratio of 14%, (meaning the company retains86% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

In addition, Zhuhai Huajin Capital has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, we feel that the performance shown by Zhuhai Huajin Capital can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Zhuhai Huajin Capital and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.