Zhejiang Fuchunjiang Environmental ThermoelectricLTD's (SZSE:002479) stock is up by a considerable 25% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Zhejiang Fuchunjiang Environmental ThermoelectricLTD's ROE today.

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 To Calculate Return On Equity?

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 Fuchunjiang Environmental ThermoelectricLTD is:

8.0% = CN¥339m ÷ CN¥4.2b (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¥0.08.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 Fuchunjiang Environmental ThermoelectricLTD's Earnings Growth And 8.0% ROE

When you first look at it, Zhejiang Fuchunjiang Environmental ThermoelectricLTD's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 8.0%, so we won't completely dismiss the company. Having said that, Zhejiang Fuchunjiang Environmental ThermoelectricLTD's five year net income decline rate was 2.4%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

So, as a next step, we compared Zhejiang Fuchunjiang Environmental ThermoelectricLTD's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 8.8% over the last few years.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Zhejiang Fuchunjiang Environmental ThermoelectricLTD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Fuchunjiang Environmental ThermoelectricLTD Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 66% (implying that 34% of the profits are retained), most of Zhejiang Fuchunjiang Environmental ThermoelectricLTD's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 4 risks we have identified for Zhejiang Fuchunjiang Environmental ThermoelectricLTD.

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

Summary

On the whole, Zhejiang Fuchunjiang Environmental ThermoelectricLTD's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. To gain further insights into Zhejiang Fuchunjiang Environmental ThermoelectricLTD'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.