Zhulian Corporation Berhad (KLSE:ZHULIAN) Is Up But Financials Look Inconsistent: Which Way Is The Stock Headed?

Zhulian Corporation Berhad's (KLSE:ZHULIAN) stock is up by 5.7% over the past three months. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. Particularly, we will be paying attention to Zhulian Corporation Berhad'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 Zhulian Corporation Berhad

How Is ROE Calculated?

ROE 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 Zhulian Corporation Berhad is:

8.0% = RM47m ÷ RM586m (Based on the trailing twelve months to November 2020).

The 'return' is the income the business earned over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.08.

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. 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.

Zhulian Corporation Berhad's Earnings Growth And 8.0% ROE

When you first look at it, Zhulian Corporation Berhad's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 6.6% which we definitely can't overlook. However, Zhulian Corporation Berhad has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Therefore, the low to flat growth in earnings could also be the result of this.

As a next step, we compared Zhulian Corporation Berhad'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 13% in the same period.

Earnings growth is a huge factor in stock valuation. 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. Is Zhulian Corporation Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhulian Corporation Berhad Efficiently Re-investing Its Profits?

Zhulian Corporation Berhad has a high three-year median payout ratio of 70% (or a retention ratio of 30%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Moreover, Zhulian Corporation Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Zhulian Corporation Berhad. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Zhulian Corporation Berhad's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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.
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