It is hard to get excited after looking at Zhejiang Taihua New Material Group's (SHSE:603055) recent performance, when its stock has declined 11% over the past three months. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Zhejiang Taihua New Material Group's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Zhejiang Taihua New Material Group is:

15% = CN¥690m ÷ CN¥4.7b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.15.

What Is The Relationship Between ROE And 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 Taihua New Material Group's Earnings Growth And 15% ROE

To start with, Zhejiang Taihua New Material Group's ROE looks acceptable. Especially when compared to the industry average of 7.8% the company's ROE looks pretty impressive. This probably laid the ground for Zhejiang Taihua New Material Group's significant 22% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Zhejiang Taihua New Material Group'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 1.7% in the same 5-year 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 Taihua New Material Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Taihua New Material Group Making Efficient Use Of Its Profits?

Zhejiang Taihua New Material Group has a three-year median payout ratio of 31% (where it is retaining 69% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Zhejiang Taihua New Material Group is reinvesting its earnings efficiently.

Besides, Zhejiang Taihua New Material Group has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Zhejiang Taihua New Material Group's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.