Zhuzhou Huarui Precision Cutting Tools Co.,Ltd.'s (SHSE:688059) Stock Is Going Strong: Is the Market Following Fundamentals?

Simply Wall St · 10/16 01:16

Zhuzhou Huarui Precision Cutting ToolsLtd (SHSE:688059) has had a great run on the share market with its stock up by a significant 25% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Zhuzhou Huarui Precision Cutting ToolsLtd'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 Zhuzhou Huarui Precision Cutting ToolsLtd

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 Zhuzhou Huarui Precision Cutting ToolsLtd is:

13% = CN¥167m ÷ CN¥1.3b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.13 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. 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. 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.

Zhuzhou Huarui Precision Cutting ToolsLtd's Earnings Growth And 13% ROE

To begin with, Zhuzhou Huarui Precision Cutting ToolsLtd seems to have a respectable ROE. Especially when compared to the industry average of 7.0% the company's ROE looks pretty impressive. This certainly adds some context to Zhuzhou Huarui Precision Cutting ToolsLtd's decent 13% net income growth seen over the past five years.

We then compared Zhuzhou Huarui Precision Cutting ToolsLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 8.7% in the same 5-year period.

past-earnings-growth
SHSE:688059 Past Earnings Growth October 16th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Zhuzhou Huarui Precision Cutting ToolsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhuzhou Huarui Precision Cutting ToolsLtd Making Efficient Use Of Its Profits?

Zhuzhou Huarui Precision Cutting ToolsLtd has a three-year median payout ratio of 32%, which implies that it retains the remaining 68% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Zhuzhou Huarui Precision Cutting ToolsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Conclusion

Overall, we are quite pleased with Zhuzhou Huarui Precision Cutting ToolsLtd'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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.