Are Robust Financials Driving The Recent Rally In ZJMI Environmental Energy Co., Ltd.'s (SHSE:603071) Stock?

Simply Wall St · 10/18 02:36

ZJMI Environmental Energy (SHSE:603071) has had a great run on the share market with its stock up by a significant 13% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to ZJMI Environmental Energy'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for ZJMI Environmental Energy

How To Calculate Return On Equity?

Return on equity 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 ZJMI Environmental Energy is:

17% = CN¥1.0b ÷ CN¥6.1b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.17 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

ZJMI Environmental Energy's Earnings Growth And 17% ROE

To begin with, ZJMI Environmental Energy seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.5%. Probably as a result of this, ZJMI Environmental Energy was able to see a decent growth of 12% over the last five years.

As a next step, we compared ZJMI Environmental Energy'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 19% in the same period.

past-earnings-growth
SHSE:603071 Past Earnings Growth October 18th 2024

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about ZJMI Environmental Energy's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is ZJMI Environmental Energy Efficiently Re-investing Its Profits?

ZJMI Environmental Energy has a three-year median payout ratio of 39%, which implies that it retains the remaining 61% 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.

While ZJMI Environmental Energy 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.

Summary

On the whole, we feel that ZJMI Environmental Energy's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.