TCL Zhonghuan Renewable Energy TechnologyLtd (SZSE:002129) has had a rough three months with its share price down 37%. 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. Specifically, we decided to study TCL Zhonghuan Renewable Energy TechnologyLtd's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To Calculate Return On Equity?

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 TCL Zhonghuan Renewable Energy TechnologyLtd is:

13% = CN¥8.2b ÷ CN¥62b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

TCL Zhonghuan Renewable Energy TechnologyLtd's Earnings Growth And 13% ROE

At first glance, TCL Zhonghuan Renewable Energy TechnologyLtd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.4%. Probably as a result of this, TCL Zhonghuan Renewable Energy TechnologyLtd was able to see an impressive net income growth of 54% over the last five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that TCL Zhonghuan Renewable Energy TechnologyLtd's growth is quite high when compared to the industry average growth of 27% in the same period, which is great 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. This then helps them determine if the stock is placed for a bright or bleak future. Is TCL Zhonghuan Renewable Energy TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is TCL Zhonghuan Renewable Energy TechnologyLtd Using Its Retained Earnings Effectively?

TCL Zhonghuan Renewable Energy TechnologyLtd has a really low three-year median payout ratio of 6.4%, meaning that it has the remaining 94% left over to reinvest into its business. So it looks like TCL Zhonghuan Renewable Energy TechnologyLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, TCL Zhonghuan Renewable Energy TechnologyLtd has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 10.0% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

In total, we are pretty happy with TCL Zhonghuan Renewable Energy TechnologyLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.