Will Weakness in China Zhenhua (Group) Science & Technology Co., Ltd's (SZSE:000733) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 15% over the past three months, it is easy to disregard China Zhenhua (Group) Science & Technology (SZSE:000733). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to China Zhenhua (Group) Science & Technology'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for China Zhenhua (Group) Science & Technology

How Is ROE Calculated?

ROE 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 China Zhenhua (Group) Science & Technology is:

14% = CN¥2.1b ÷ CN¥14b (Based on the trailing twelve months to March 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¥0.14 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of China Zhenhua (Group) Science & Technology's Earnings Growth And 14% ROE

To start with, China Zhenhua (Group) Science & Technology's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.3%. This certainly adds some context to China Zhenhua (Group) Science & Technology's exceptional 43% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that China Zhenhua (Group) Science & Technology's growth is quite high when compared to the industry average growth of 6.4% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is China Zhenhua (Group) Science & Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is China Zhenhua (Group) Science & Technology Making Efficient Use Of Its Profits?

China Zhenhua (Group) Science & Technology's ' three-year median payout ratio is on the lower side at 10% implying that it is retaining a higher percentage (90%) of its profits. So it looks like China Zhenhua (Group) Science & Technology is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, China Zhenhua (Group) Science & Technology has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with China Zhenhua (Group) Science & Technology's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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