Do Its Financials Have Any Role To Play In Driving Zhejiang Extek Technology Co., Ltd.'s (SZSE:301399) Stock Up Recently?

Simply Wall St · 11/25 22:18

Zhejiang Extek Technology (SZSE:301399) has had a great run on the share market with its stock up by a significant 39% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Zhejiang Extek Technology's ROE.

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 Zhejiang Extek Technology

How To Calculate Return On Equity?

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 Zhejiang Extek Technology is:

5.4% = CN¥70m ÷ CN¥1.3b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

What Has ROE Got To Do With 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Zhejiang Extek Technology's Earnings Growth And 5.4% ROE

At first glance, Zhejiang Extek Technology's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.3%, we may spare it some thought. Having said that, Zhejiang Extek Technology has shown a modest net income growth of 11% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Zhejiang Extek Technology's growth is quite high when compared to the industry average growth of 7.3% in the same period, which is great to see.

past-earnings-growth
SZSE:301399 Past Earnings Growth November 25th 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Zhejiang Extek Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Extek Technology Making Efficient Use Of Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a regular dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, it does look like Zhejiang Extek Technology has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Up till now, we've only made a short study of the company's growth data. You can do your own research on Zhejiang Extek Technology and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.