Most readers would already be aware that Zhejiang Cfmoto PowerLtd's (SHSE:603129) stock increased significantly by 27% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Zhejiang Cfmoto PowerLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How To Calculate Return On Equity?

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 Cfmoto PowerLtd is:

19% = CN¥981m ÷ CN¥5.0b (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¥0.19 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Zhejiang Cfmoto PowerLtd's Earnings Growth And 19% ROE

At first glance, Zhejiang Cfmoto PowerLtd seems to have a decent ROE. On comparing with the average industry ROE of 7.4% the company's ROE looks pretty remarkable. Probably as a result of this, Zhejiang Cfmoto PowerLtd was able to see an impressive net income growth of 39% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings 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.

We then compared Zhejiang Cfmoto PowerLtd'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 9.3% in the same 5-year period.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Zhejiang Cfmoto PowerLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Cfmoto PowerLtd Efficiently Re-investing Its Profits?

Zhejiang Cfmoto PowerLtd has a three-year median payout ratio of 27% (where it is retaining 73% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Zhejiang Cfmoto PowerLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Zhejiang Cfmoto PowerLtd is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 30%. Accordingly, forecasts suggest that Zhejiang Cfmoto PowerLtd's future ROE will be 22% which is again, similar to the current ROE.

Summary

On the whole, we feel that Zhejiang Cfmoto PowerLtd's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.