Is Weakness In Zhejiang Xinan Chemical Industrial Group Co.,Ltd (SHSE:600596) Stock A Sign That The Market Could Be Wrong Given Its Strong Financial Prospects?

Simply Wall St · Jan 10, 2023 07:05

Zhejiang Xinan Chemical Industrial GroupLtd (SHSE:600596) has had a rough month with its share price down 6.5%. 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 Zhejiang Xinan Chemical Industrial GroupLtd's ROE in this article.

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.

See our latest analysis for Zhejiang Xinan Chemical Industrial GroupLtd

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 Xinan Chemical Industrial GroupLtd is:

32% = CN¥4.0b ÷ CN¥12b (Based on the trailing twelve months to September 2022).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.32 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. 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. 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.

Zhejiang Xinan Chemical Industrial GroupLtd's Earnings Growth And 32% ROE

To begin with, Zhejiang Xinan Chemical Industrial GroupLtd has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 9.6% the company's ROE is quite impressive. So, the substantial 40% net income growth seen by Zhejiang Xinan Chemical Industrial GroupLtd over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Zhejiang Xinan Chemical Industrial GroupLtd's growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.

past-earnings-growth — SHSE:600596 Past Earnings Growth January 9th 2023

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Zhejiang Xinan Chemical Industrial GroupLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Xinan Chemical Industrial GroupLtd Making Efficient Use Of Its Profits?

Zhejiang Xinan Chemical Industrial GroupLtd's ' three-year median payout ratio is on the lower side at 23% implying that it is retaining a higher percentage (77%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Zhejiang Xinan Chemical Industrial 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.

Conclusion

In total, we are pretty happy with Zhejiang Xinan Chemical Industrial GroupLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.