Should Weakness in Zhejiang Yuejian Intelligent Equipment Co.,Ltd.'s (SHSE:603095) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Simply Wall St · Mar 28 15:51

With its stock down 15% over the past week, it is easy to disregard Zhejiang Yuejian Intelligent EquipmentLtd (SHSE:603095). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Zhejiang Yuejian Intelligent EquipmentLtd's ROE today.

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.

How Is ROE Calculated?

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 Zhejiang Yuejian Intelligent EquipmentLtd is:

3.4% = CN¥86m ÷ CN¥2.5b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax 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¥0.03 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Zhejiang Yuejian Intelligent EquipmentLtd's Earnings Growth And 3.4% ROE

As you can see, Zhejiang Yuejian Intelligent EquipmentLtd's ROE looks pretty weak. Not just that, even compared to the industry average of 7.5%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Zhejiang Yuejian Intelligent EquipmentLtd saw an exceptional 25% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Zhejiang Yuejian Intelligent EquipmentLtd'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 11% in the same 5-year period.

past-earnings-growth — SHSE:603095 Past Earnings Growth March 28th 2024

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Zhejiang Yuejian Intelligent EquipmentLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Yuejian Intelligent EquipmentLtd Using Its Retained Earnings Effectively?

Zhejiang Yuejian Intelligent EquipmentLtd has a three-year median payout ratio of 33% (where it is retaining 67% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Zhejiang Yuejian Intelligent EquipmentLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Zhejiang Yuejian Intelligent EquipmentLtd has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like Zhejiang Yuejian Intelligent EquipmentLtd has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Zhejiang Yuejian Intelligent EquipmentLtd visit our risks dashboard for free.

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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.