Zhejiang Sanhua Intelligent ControlsLtd (SZSE:002050) has had a rough month with its share price down 20%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Zhejiang Sanhua Intelligent ControlsLtd'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Zhejiang Sanhua Intelligent ControlsLtd

How Is ROE Calculated?

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 Sanhua Intelligent ControlsLtd is:

18% = CN¥3.2b ÷ CN¥17b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.18 in profit.

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. 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.

Zhejiang Sanhua Intelligent ControlsLtd's Earnings Growth And 18% ROE

To begin with, Zhejiang Sanhua Intelligent ControlsLtd seems to have a respectable ROE. Especially when compared to the industry average of 7.5% the company's ROE looks pretty impressive. Probably as a result of this, Zhejiang Sanhua Intelligent ControlsLtd was able to see a decent growth of 18% over the last five years.

Next, on comparing with the industry net income growth, we found that Zhejiang Sanhua Intelligent ControlsLtd's growth is quite high when compared to the industry average growth of 11% 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. Doing so will help them establish if the stock's future looks promising or ominous. What is 002050 worth today? The intrinsic value infographic in our free research report helps visualize whether 002050 is currently mispriced by the market.

Is Zhejiang Sanhua Intelligent ControlsLtd Efficiently Re-investing Its Profits?

Zhejiang Sanhua Intelligent ControlsLtd has a healthy combination of a moderate three-year median payout ratio of 44% (or a retention ratio of 56%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Zhejiang Sanhua Intelligent ControlsLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 33% over the next three years. The fact that the company's ROE is expected to rise to 22% over the same period is explained by the drop in the payout ratio.

Conclusion

On the whole, we feel that Zhejiang Sanhua Intelligent ControlsLtd'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 substantial growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.