Zhejiang Sanhua Intelligent ControlsLtd (SZSE:002050) has had a great run on the share market with its stock up by a significant 12% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Zhejiang Sanhua Intelligent ControlsLtd's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. 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 Sanhua Intelligent ControlsLtd
How To Calculate Return On Equity?
ROE 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 Zhejiang Sanhua Intelligent ControlsLtd is:
15% = CN¥1.8b ÷ CN¥12b (Based on the trailing twelve months to March 2022).
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¥0.15 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. 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.
A Side By Side comparison of Zhejiang Sanhua Intelligent ControlsLtd's Earnings Growth And 15% ROE
To start with, Zhejiang Sanhua Intelligent ControlsLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.2%. This certainly adds some context to Zhejiang Sanhua Intelligent ControlsLtd's decent 8.5% net income growth seen over the past five years.
As a next step, we compared Zhejiang Sanhua Intelligent ControlsLtd'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 14% in the same period.SZSE:002050 Past Earnings Growth June 7th 2022
Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Zhejiang Sanhua Intelligent ControlsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Zhejiang Sanhua Intelligent ControlsLtd Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 53% (or a retention ratio of 47%) for Zhejiang Sanhua Intelligent ControlsLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Zhejiang Sanhua Intelligent ControlsLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 38% over the next three years. As a result, the expected drop in Zhejiang Sanhua Intelligent ControlsLtd's payout ratio explains the anticipated rise in the company's future ROE to 20%, over the same period.
On the whole, we do feel that Zhejiang Sanhua Intelligent ControlsLtd has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.