Is Zhuzhou Hongda Electronics Corp.,Ltd.'s (SZSE:300726) Recent Stock Performance Tethered To Its Strong Fundamentals?

Zhuzhou Hongda ElectronicsLtd's (SZSE:300726) stock is up by a considerable 42% over the past three months. 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. Specifically, we decided to study Zhuzhou Hongda ElectronicsLtd's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Zhuzhou Hongda ElectronicsLtd

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 Zhuzhou Hongda ElectronicsLtd is:

7.9% = CN¥411m ÷ CN¥5.2b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.08 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.

Zhuzhou Hongda ElectronicsLtd's Earnings Growth And 7.9% ROE

On the face of it, Zhuzhou Hongda ElectronicsLtd's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 6.3% doesn't go unnoticed by us. Consequently, this likely laid the ground for the decent growth of 6.5% seen over the past five years by Zhuzhou Hongda ElectronicsLtd. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing with the industry net income growth, we found that Zhuzhou Hongda ElectronicsLtd's growth is quite high when compared to the industry average growth of 3.9% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Zhuzhou Hongda ElectronicsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhuzhou Hongda ElectronicsLtd Efficiently Re-investing Its Profits?

Zhuzhou Hongda ElectronicsLtd has a healthy combination of a moderate three-year median payout ratio of 29% (or a retention ratio of 71%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Moreover, Zhuzhou Hongda ElectronicsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Conclusion

In total, we are pretty happy with Zhuzhou Hongda ElectronicsLtd's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.