It is hard to get excited after looking at Zhejiang Meorient Commerce Exhibition's (SZSE:300795) recent performance, when its stock has declined 28% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Zhejiang Meorient Commerce Exhibition's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Meorient Commerce Exhibition is:

29% = CN¥201m ÷ CN¥684m (Based on the trailing twelve months to March 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¥0.29.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Zhejiang Meorient Commerce Exhibition's Earnings Growth And 29% ROE

First thing first, we like that Zhejiang Meorient Commerce Exhibition has an impressive ROE. Secondly, even when compared to the industry average of 4.9% the company's ROE is quite impressive. As a result, Zhejiang Meorient Commerce Exhibition's exceptional 29% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Zhejiang Meorient Commerce Exhibition'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 1.8% in the same 5-year period.

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 Meorient Commerce Exhibition fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Meorient Commerce Exhibition Efficiently Re-investing Its Profits?

The three-year median payout ratio for Zhejiang Meorient Commerce Exhibition is 40%, which is moderately low. The company is retaining the remaining 60%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Zhejiang Meorient Commerce Exhibition is reinvesting its earnings efficiently.

Besides, Zhejiang Meorient Commerce Exhibition has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 37% of its profits over the next three years. As a result, Zhejiang Meorient Commerce Exhibition's ROE is not expected to change by much either, which we inferred from the analyst estimate of 30% for future ROE.

Conclusion

In total, we are pretty happy with Zhejiang Meorient Commerce Exhibition'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. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.

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