With its stock down 18% over the past three months, it is easy to disregard Zhejiang XiaSha Precision ManufacturingLtd (SZSE:001306). 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. In this article, we decided to focus on Zhejiang XiaSha Precision ManufacturingLtd’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
Check out our latest analysis for Zhejiang XiaSha Precision ManufacturingLtd
How Is ROE Calculated?
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 XiaSha Precision ManufacturingLtd is:
5.5% = CN¥73m ÷ CN¥1.3b (Based on the trailing twelve months to March 2024).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.
Why Is ROE Important For 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.
Zhejiang XiaSha Precision ManufacturingLtd’s Earnings Growth And 5.5% ROE
When you first look at it, Zhejiang XiaSha Precision ManufacturingLtd’s ROE doesn’t look that attractive. However, given that the company’s ROE is similar to the average industry ROE of 6.8%, we may spare it some thought. Having said that, Zhejiang XiaSha Precision ManufacturingLtd has shown a modest net income growth of 16% 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.
Next, on comparing with the industry net income growth, we found that Zhejiang XiaSha Precision ManufacturingLtd’s growth is quite high when compared to the industry average growth of 9.4% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. 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 XiaSha Precision ManufacturingLtd’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Zhejiang XiaSha Precision ManufacturingLtd Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 44% (implying that the company retains 56% of its profits), it seems that Zhejiang XiaSha Precision ManufacturingLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.
Conclusion
Overall, we feel that Zhejiang XiaSha Precision ManufacturingLtd certainly does have some positive factors to consider. 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 2 risks we have identified for Zhejiang XiaSha Precision ManufacturingLtd visit our risks dashboard for free.
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Find out whether Zhejiang XiaSha Precision ManufacturingLtd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
