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Is Zhejiang Sanhua Intelligent Controls Co.,Ltd's (SZSE:002050) Recent Stock Performance Tethered To Its Strong Fundamentals?

Simply Wall St ·  {{timeTz}}

Zhejiang Sanhua Intelligent ControlsLtd's (SZSE:002050) stock is up by a considerable 36% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Zhejiang Sanhua Intelligent ControlsLtd's ROE today.

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 Sanhua Intelligent ControlsLtd

How Do You Calculate Return On Equity?

Return on equity 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:

16% = CN¥1.9b ÷ CN¥12b (Based on the trailing twelve months to June 2022).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.16 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. 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 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 16% ROE

To start with, Zhejiang Sanhua Intelligent ControlsLtd's ROE looks acceptable. On comparing with the average industry ROE of 8.0% the company's ROE looks pretty remarkable. Probably as a result of this, Zhejiang Sanhua Intelligent ControlsLtd was able to see a decent growth of 8.7% over the last five years.

We then compared Zhejiang Sanhua Intelligent ControlsLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same period, which is a bit concerning.

past-earnings-growthSZSE:002050 Past Earnings Growth September 13th 2022

Earnings growth is an important metric to consider when valuing a stock. 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. Is Zhejiang Sanhua Intelligent ControlsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

Zhejiang Sanhua Intelligent ControlsLtd has a three-year median payout ratio of 48%, which implies that it retains the remaining 52% 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.

Moreover, Zhejiang Sanhua Intelligent ControlsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 35% 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 21%, over the same period.

Conclusion

In total, we are pretty happy with Zhejiang Sanhua Intelligent ControlsLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

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.

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