Could The Market Be Wrong About Zhong An Intelligent Living Service Limited (HKG:2271) Given Its Attractive Financial Prospects?

With its stock down 45% over the past month, it is easy to disregard Zhong An Intelligent Living Service (HKG:2271). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Zhong An Intelligent Living Service'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Zhong An Intelligent Living Service

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Zhong An Intelligent Living Service is:

17% = CN¥48m ÷ CN¥276m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.17 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Zhong An Intelligent Living Service's Earnings Growth And 17% ROE

At first glance, Zhong An Intelligent Living Service seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 5.4%. This certainly adds some context to Zhong An Intelligent Living Service's decent 13% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Zhong An Intelligent Living Service compares quite favourably to the industry average, which shows a decline of 1.5% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Zhong An Intelligent Living Service's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhong An Intelligent Living Service Making Efficient Use Of Its Profits?

In Zhong An Intelligent Living Service's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 22% (or a retention ratio of 78%), which suggests that the company is investing most of its profits to grow its business.

While Zhong An Intelligent Living Service has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

Overall, we are quite pleased with Zhong An Intelligent Living Service'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 3 risks we have identified for Zhong An Intelligent Living Service by visiting our risks dashboard for free on our platform here.

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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.