Zhejiang Fuchunjiang Environmental Thermoelectric Co.,LTD.'s (SZSE:002479) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Zhejiang Fuchunjiang Environmental ThermoelectricLTD's (SZSE:002479) stock is up by a considerable 38% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to Zhejiang Fuchunjiang Environmental ThermoelectricLTD'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Zhejiang Fuchunjiang Environmental ThermoelectricLTD

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Zhejiang Fuchunjiang Environmental ThermoelectricLTD is:

9.2% = CN¥407m ÷ CN¥4.4b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.09.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Zhejiang Fuchunjiang Environmental ThermoelectricLTD's Earnings Growth And 9.2% ROE

At first glance, Zhejiang Fuchunjiang Environmental ThermoelectricLTD's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 7.7%, we may spare it some thought. Having said that, Zhejiang Fuchunjiang Environmental ThermoelectricLTD's five year net income decline rate was 4.5%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

So, as a next step, we compared Zhejiang Fuchunjiang Environmental ThermoelectricLTD's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 10% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Zhejiang Fuchunjiang Environmental ThermoelectricLTD is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Fuchunjiang Environmental ThermoelectricLTD Making Efficient Use Of Its Profits?

Zhejiang Fuchunjiang Environmental ThermoelectricLTD's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 66% (or a retention ratio of 34%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 4 risks we have identified for Zhejiang Fuchunjiang Environmental ThermoelectricLTD visit our risks dashboard for free.

Additionally, Zhejiang Fuchunjiang Environmental ThermoelectricLTD has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Zhejiang Fuchunjiang Environmental ThermoelectricLTD. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Zhejiang Fuchunjiang Environmental ThermoelectricLTD's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.