Zhejiang Dahua Technology Co., Ltd.'s (SZSE:002236) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

It is hard to get excited after looking at Zhejiang Dahua Technology's (SZSE:002236) recent performance, when its stock has declined 6.4% over the past week. 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. Specifically, we decided to study Zhejiang Dahua Technology'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How To 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 Dahua Technology is:

20% = CN¥7.4b ÷ CN¥37b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.20.

Check out our latest analysis for Zhejiang Dahua Technology

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Zhejiang Dahua Technology's Earnings Growth And 20% ROE

To begin with, Zhejiang Dahua Technology seems to have a respectable ROE. On comparing with the average industry ROE of 6.0% the company's ROE looks pretty remarkable. Probably as a result of this, Zhejiang Dahua Technology was able to see a decent growth of 15% over the last five years.

Next, on comparing with the industry net income growth, we found that Zhejiang Dahua Technology's growth is quite high when compared to the industry average growth of 3.9% 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. 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 Zhejiang Dahua Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Dahua Technology Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 29% (implying that the company retains 71% of its profits), it seems that Zhejiang Dahua Technology is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Zhejiang Dahua 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 31%. However, Zhejiang Dahua Technology's future ROE is expected to decline to 11% despite there being not much change anticipated in the company's payout ratio.

Summary

Overall, we are quite pleased with Zhejiang Dahua 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, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.