Zhejiang Changsheng Sliding Bearings (SZSE:300718) has had a rough week with its share price down 8.7%. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Zhejiang Changsheng Sliding Bearings' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Changsheng Sliding Bearings is:

15% = CN¥244m ÷ CN¥1.7b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.15 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. 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. 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 Changsheng Sliding Bearings' Earnings Growth And 15% ROE

To start with, Zhejiang Changsheng Sliding Bearings' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.9%. This certainly adds some context to Zhejiang Changsheng Sliding Bearings' decent 6.9% net income growth seen over the past five years.

We then compared Zhejiang Changsheng Sliding Bearings' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.6% in the same 5-year period, which is a bit concerning.

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. 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 Changsheng Sliding Bearings is trading on a high P/E or a low P/E, relative to its industry.

Is Zhejiang Changsheng Sliding Bearings Using Its Retained Earnings Effectively?

Zhejiang Changsheng Sliding Bearings has a significant three-year median payout ratio of 67%, meaning that it is left with only 33% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Moreover, Zhejiang Changsheng Sliding Bearings is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Conclusion

On the whole, we do feel that Zhejiang Changsheng Sliding Bearings has some positive attributes. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.