Can Zhongyeda Electric Co., Ltd.'s (SZSE:002441) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Simply Wall St · 10/15 22:48

Zhongyeda Electric (SZSE:002441) has had a great run on the share market with its stock up by a significant 16% over the last month. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Zhongyeda Electric's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Zhongyeda Electric

How Do You Calculate Return On Equity?

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 Zhongyeda Electric is:

3.9% = CN¥176m ÷ CN¥4.6b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Zhongyeda Electric's Earnings Growth And 3.9% ROE

As you can see, Zhongyeda Electric's ROE looks pretty weak. Even when compared to the industry average of 5.2%, the ROE figure is pretty disappointing. Therefore, Zhongyeda Electric's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Zhongyeda Electric's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.3% in the same 5-year period, which is a bit concerning.

past-earnings-growth
SZSE:002441 Past Earnings Growth October 15th 2024

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Zhongyeda Electric fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhongyeda Electric Using Its Retained Earnings Effectively?

Zhongyeda Electric has a high three-year median payout ratio of 61% (or a retention ratio of 39%), 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, Zhongyeda Electric 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.

Summary

Overall, we would be extremely cautious before making any decision on Zhongyeda Electric. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Zhongyeda Electric and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.