Are Zhejiang Asia-Pacific Mechanical & Electronic Co.,Ltd's (SZSE:002284) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Simply Wall St · Nov 13, 2023 17:34

With its stock down 5.7% over the past week, it is easy to disregard Zhejiang Asia-Pacific Mechanical & ElectronicLtd (SZSE:002284). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Zhejiang Asia-Pacific Mechanical & ElectronicLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Zhejiang Asia-Pacific Mechanical & ElectronicLtd

How Do You Calculate Return On Equity?

Return on equity 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 Asia-Pacific Mechanical & ElectronicLtd is:

4.5% = CN¥125m ÷ CN¥2.8b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

Why Is ROE Important For 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. 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 Asia-Pacific Mechanical & ElectronicLtd's Earnings Growth And 4.5% ROE

As you can see, Zhejiang Asia-Pacific Mechanical & ElectronicLtd's ROE looks pretty weak. Not just that, even compared to the industry average of 7.4%, the company's ROE is entirely unremarkable. In spite of this, Zhejiang Asia-Pacific Mechanical & ElectronicLtd was able to grow its net income considerably, at a rate of 50% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Zhejiang Asia-Pacific Mechanical & ElectronicLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.0%.

past-earnings-growth — SZSE:002284 Past Earnings Growth November 13th 2023

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Zhejiang Asia-Pacific Mechanical & ElectronicLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Asia-Pacific Mechanical & ElectronicLtd Making Efficient Use Of Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. This is likely what's driving the high earnings growth number discussed above.

Summary

In total, it does look like Zhejiang Asia-Pacific Mechanical & ElectronicLtd has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.