With its stock down 22% over the past three months, it is easy to disregard Zhuzhou Kibing GroupLtd (SHSE:601636). However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Zhuzhou Kibing GroupLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Zhuzhou Kibing GroupLtd is:

6.6% = CN¥895m ÷ CN¥14b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 in profit.

What Has ROE Got To Do With 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. 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 Zhuzhou Kibing GroupLtd's Earnings Growth And 6.6% ROE

At first glance, Zhuzhou Kibing GroupLtd's ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.4%, so we won't completely dismiss the company. On the other hand, Zhuzhou Kibing GroupLtd reported a moderate 13% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's 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.

We then compared Zhuzhou Kibing GroupLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.0% in the same 5-year period.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is 601636 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Zhuzhou Kibing GroupLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 51% (or a retention ratio of 49%) for Zhuzhou Kibing GroupLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Zhuzhou Kibing GroupLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 48%. However, Zhuzhou Kibing GroupLtd's ROE is predicted to rise to 18% despite there being no anticipated change in its payout ratio.

Summary

In total, it does look like Zhuzhou Kibing GroupLtd has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.