Zhejiang Wellsun Intelligent TechnologyLtd (SZSE:300882) has had a great run on the share market with its stock up by a significant 41% 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 Wellsun Intelligent TechnologyLtd'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.

Check out our latest analysis for Zhejiang Wellsun Intelligent TechnologyLtd

How Do You 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 Wellsun Intelligent TechnologyLtd is:

7.7% = CN¥64m ÷ CN¥838m (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Zhejiang Wellsun Intelligent TechnologyLtd's Earnings Growth And 7.7% ROE

On the face of it, Zhejiang Wellsun Intelligent TechnologyLtd's ROE is not much to talk about. However, its ROE is similar to the industry average of 9.0%, so we won't completely dismiss the company. Even so, Zhejiang Wellsun Intelligent TechnologyLtd has shown a fairly decent growth in its net income which grew at a rate of 6.9%. 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 instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Zhejiang Wellsun Intelligent TechnologyLtd's reported growth was lower than the industry growth of 16% in the same period, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Zhejiang Wellsun Intelligent TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Wellsun Intelligent TechnologyLtd Making Efficient Use Of Its Profits?

Zhejiang Wellsun Intelligent TechnologyLtd has a three-year median payout ratio of 46%, which implies that it retains the remaining 54% 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 Zhejiang Wellsun Intelligent TechnologyLtd 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

In total, it does look like Zhejiang Wellsun Intelligent TechnologyLtd has some positive aspects to its business. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Zhejiang Wellsun Intelligent TechnologyLtd by visiting our risks dashboard for free on our platform here.

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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.