Zhejiang Langdi Group's (SHSE:603726) stock is up by a considerable 45% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on Zhejiang Langdi Group's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Zhejiang Langdi Group

How Do You Calculate Return On Equity?

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 Langdi Group is:

7.5% = CN¥90m ÷ CN¥1.2b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

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

A Side By Side comparison of Zhejiang Langdi Group's Earnings Growth And 7.5% ROE

When you first look at it, Zhejiang Langdi Group's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 7.5%, we may spare it some thought. Having said that, Zhejiang Langdi Group's net income growth over the past five years is more or less flat. Remember, the company's ROE is not particularly great to begin with. So that could also be one of the reasons behind the company's flat growth in earnings.

As a next step, we compared Zhejiang Langdi Group's net income growth with the industry and discovered that the industry saw an average growth of 11% in the same period.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Zhejiang Langdi Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Langdi Group Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 65% (implying that the company keeps only 35% of its income) of its business to reinvest into its business), most of Zhejiang Langdi Group's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Zhejiang Langdi Group has been paying dividends over a period of six years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Zhejiang Langdi Group. 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. To gain further insights into Zhejiang Langdi Group's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.