Zhejiang Xinhua ChemicalLtd (SHSE:603867) has had a great run on the share market with its stock up by a significant 28% over the last 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 Xinhua ChemicalLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Do You 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 Xinhua ChemicalLtd is:

11% = CN¥270m ÷ CN¥2.5b (Based on the trailing twelve months to September 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¥0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Xinhua ChemicalLtd's Earnings Growth And 11% ROE

To start with, Zhejiang Xinhua ChemicalLtd's ROE looks acceptable. Especially when compared to the industry average of 6.2% the company's ROE looks pretty impressive. Probably as a result of this, Zhejiang Xinhua ChemicalLtd was able to see a decent growth of 14% over the last five years.

Next, on comparing with the industry net income growth, we found that Zhejiang Xinhua ChemicalLtd's growth is quite high when compared to the industry average growth of 4.9% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Zhejiang Xinhua ChemicalLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Xinhua ChemicalLtd Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 33% (implying that the company retains 67% of its profits), it seems that Zhejiang Xinhua ChemicalLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Zhejiang Xinhua ChemicalLtd has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Zhejiang Xinhua ChemicalLtd's performance. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.