Zhejiang Daily Digital Culture GroupLtd (SHSE:600633) has had a great run on the share market with its stock up by a significant 13% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Zhejiang Daily Digital Culture GroupLtd's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Is ROE Calculated?
ROE 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 Daily Digital Culture GroupLtd is:
8.1% = CN¥873m ÷ CN¥11b (Based on the trailing twelve months to September 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¥0.08 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Daily Digital Culture GroupLtd's Earnings Growth And 8.1% ROE
At first glance, Zhejiang Daily Digital Culture GroupLtd's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 5.5% doesn't go unnoticed by us. This certainly adds some context to Zhejiang Daily Digital Culture GroupLtd's moderate 6.2% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.
As a next step, we compared Zhejiang Daily Digital Culture GroupLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 16% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 600633? You can find out in our latest intrinsic value infographic research report.
Is Zhejiang Daily Digital Culture GroupLtd Using Its Retained Earnings Effectively?
Zhejiang Daily Digital Culture GroupLtd has a low three-year median payout ratio of 20%, meaning that the company retains the remaining 80% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Additionally, Zhejiang Daily Digital Culture GroupLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 32% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.
Conclusion
On the whole, we do feel that Zhejiang Daily Digital Culture GroupLtd has some positive attributes. Specifically, we like that the company is reinvesting a huge chunk of its profits at a respectable rate of return. This of course has caused the company to see a good amount of growth in its earnings. 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.