Zhejiang Meishuo Electric TechnologyLtd (SZSE:301295) has had a great run on the share market with its stock up by a significant 28% over the last week. 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. Particularly, we will be paying attention to Zhejiang Meishuo Electric TechnologyLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Meishuo Electric TechnologyLtd is:

4.1% = CN¥40m ÷ CN¥975m (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.

What Is The Relationship Between ROE And 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. 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 Meishuo Electric TechnologyLtd's Earnings Growth And 4.1% ROE

As you can see, Zhejiang Meishuo Electric TechnologyLtd's ROE looks pretty weak. Even when compared to the industry average of 6.9%, the ROE figure is pretty disappointing. Thus, the low net income growth of 3.0% seen by Zhejiang Meishuo Electric TechnologyLtd over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Zhejiang Meishuo Electric TechnologyLtd's reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.

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. Is Zhejiang Meishuo Electric TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Meishuo Electric TechnologyLtd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 78% (that is, the company retains only 22% of its income) over the past three years for Zhejiang Meishuo Electric TechnologyLtd suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Summary

In total, we would have a hard think before deciding on any investment action concerning Zhejiang Meishuo Electric TechnologyLtd. 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. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. Our risks dashboard would have the 3 risks we have identified for Zhejiang Meishuo Electric TechnologyLtd.

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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.

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