ZheJiang HuaSheng TechnologyLtd's (SHSE:605180) stock is up by a considerable 52% over the past month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to ZheJiang HuaSheng TechnologyLtd's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You Calculate Return On Equity?
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 HuaSheng TechnologyLtd is:
3.1% = CN¥34m ÷ CN¥1.1b (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 in profit.
Why Is ROE Important For 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. 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.
ZheJiang HuaSheng TechnologyLtd's Earnings Growth And 3.1% ROE
As you can see, ZheJiang HuaSheng TechnologyLtd's ROE looks pretty weak. Not just that, even compared to the industry average of 7.1%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 6.9% seen by ZheJiang HuaSheng TechnologyLtd over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
So, as a next step, we compared ZheJiang HuaSheng TechnologyLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 12% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about ZheJiang HuaSheng TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is ZheJiang HuaSheng TechnologyLtd Making Efficient Use Of Its Profits?
ZheJiang HuaSheng TechnologyLtd has a high three-year median payout ratio of 64% (that is, it is retaining 36% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 4 risks we have identified for ZheJiang HuaSheng TechnologyLtd by visiting our risks dashboard for free on our platform here.
Only recently, ZheJiang HuaSheng TechnologyLtd stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends.
Conclusion
On the whole, ZheJiang HuaSheng TechnologyLtd's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of ZheJiang HuaSheng TechnologyLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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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.