Chongqing Zongshen Power Machinery Co.,Ltd's (SZSE:001696) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Simply Wall St · Nov 16, 2023 18:58

Most readers would already be aware that Chongqing Zongshen Power MachineryLtd's (SZSE:001696) stock increased significantly by 5.5% over the past week. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. In this article, we decided to focus on Chongqing Zongshen Power MachineryLtd'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Chongqing Zongshen Power MachineryLtd

How Is ROE Calculated?

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 Chongqing Zongshen Power MachineryLtd is:

7.3% = CN¥387m ÷ CN¥5.3b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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 Chongqing Zongshen Power MachineryLtd's Earnings Growth And 7.3% ROE

When you first look at it, Chongqing Zongshen Power MachineryLtd's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.4%. Still, Chongqing Zongshen Power MachineryLtd has seen a flat net income growth over the past five years. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Chongqing Zongshen Power MachineryLtd's reported growth was lower than the industry growth of 3.8% over the last few years, which is not something we like to see.

past-earnings-growth — SZSE:001696 Past Earnings Growth November 16th 2023

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Chongqing Zongshen Power MachineryLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chongqing Zongshen Power MachineryLtd Efficiently Re-investing Its Profits?

Chongqing Zongshen Power MachineryLtd has a high three-year median payout ratio of 63% (or a retention ratio of 37%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Additionally, Chongqing Zongshen Power MachineryLtd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Chongqing Zongshen Power MachineryLtd. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Chongqing Zongshen Power MachineryLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.