It is hard to get excited after looking at Zhejiang Shuanghuan DrivelineLtd's (SZSE:002472) recent performance, when its stock has declined 7.4% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Zhejiang Shuanghuan DrivelineLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Zhejiang Shuanghuan DrivelineLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Zhejiang Shuanghuan DrivelineLtd is:

9.6% = CN¥783m ÷ CN¥8.1b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.10 in profit.

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. 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. 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 Shuanghuan DrivelineLtd's Earnings Growth And 9.6% ROE

At first glance, Zhejiang Shuanghuan DrivelineLtd's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 7.3% doesn't go unnoticed by us. Particularly, the substantial 44% net income growth seen by Zhejiang Shuanghuan DrivelineLtd over the past five years is impressive . Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing with the industry net income growth, we found that Zhejiang Shuanghuan DrivelineLtd's growth is quite high when compared to the industry average growth of 3.8% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for 002472? You can find out in our latest intrinsic value infographic research report.

Is Zhejiang Shuanghuan DrivelineLtd Making Efficient Use Of Its Profits?

Zhejiang Shuanghuan DrivelineLtd's three-year median payout ratio to shareholders is 10.0%, which is quite low. This implies that the company is retaining 90% of its profits. So it looks like Zhejiang Shuanghuan DrivelineLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Zhejiang Shuanghuan DrivelineLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 17% over the next three years. Regardless, the future ROE for Zhejiang Shuanghuan DrivelineLtd is speculated to rise to 13% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

On the whole, we feel that Zhejiang Shuanghuan DrivelineLtd's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.