Are Zhuzhou CRRC Times Electric Co., Ltd.'s (HKG:3898) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 7.5% over the past month, it is easy to disregard Zhuzhou CRRC Times Electric (HKG:3898). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study Zhuzhou CRRC Times Electric'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Zhuzhou CRRC Times Electric

How Do You Calculate Return On Equity?

Return on equity 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 Zhuzhou CRRC Times Electric is:

8.6% = CN¥3.3b ÷ CN¥38b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Zhuzhou CRRC Times Electric's Earnings Growth And 8.6% ROE

When you first look at it, Zhuzhou CRRC Times Electric's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. Accordingly, Zhuzhou CRRC Times Electric's low net income growth of 2.8% over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Zhuzhou CRRC Times Electric's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 8.1% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 3898? You can find out in our latest intrinsic value infographic research report.

Is Zhuzhou CRRC Times Electric Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 29% (implying that the company retains the remaining 71% of its income), Zhuzhou CRRC Times Electric's earnings growth was quite low. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Zhuzhou CRRC Times Electric 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 34% of its profits over the next three years. Accordingly, forecasts suggest that Zhuzhou CRRC Times Electric's future ROE will be 10% which is again, similar to the current ROE.

Summary

In total, we're a bit ambivalent about Zhuzhou CRRC Times Electric's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com