Zhong An Intelligent Living Service Limited's (HKG:2271) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

With its stock down 44% over the past three months, it is easy to disregard Zhong An Intelligent Living Service (HKG:2271). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Zhong An Intelligent Living Service's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

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 Zhong An Intelligent Living Service is:

11% = CN¥34m ÷ CN¥300m (Based on the trailing twelve months to June 2025).

The 'return' is the amount earned after tax over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.11 in profit.

See our latest analysis for Zhong An Intelligent Living Service

What Has ROE Got To Do With 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. 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 11% 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 3.7%. Given the circumstances, we can't help but wonder why Zhong An Intelligent Living Service saw little to no growth in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

We then compared Zhong An Intelligent Living Service's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 4.5% in the same 5-year period. This does offer shareholders some relief

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 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 spite of a normal three-year median payout ratio of 26% (or a retention ratio of 74%), Zhong An Intelligent Living Service hasn't seen much growth in its earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Only recently, Zhong An Intelligent Living Service started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Summary

In total, it does look like Zhong An Intelligent Living Service has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Zhong An Intelligent Living Service and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.