Zhejiang Cfmoto PowerLtd (SHSE:603129) has had a rough three months with its share price down 36%. 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 Cfmoto PowerLtd's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Zhejiang Cfmoto PowerLtd

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 Cfmoto PowerLtd is:

19% = CN¥981m ÷ CN¥5.0b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.19 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. 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 Cfmoto PowerLtd's Earnings Growth And 19% ROE

At first glance, Zhejiang Cfmoto PowerLtd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.4%. Probably as a result of this, Zhejiang Cfmoto PowerLtd was able to see an impressive net income growth of 39% over the last five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Zhejiang Cfmoto PowerLtd'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 9.3%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Zhejiang Cfmoto PowerLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Cfmoto PowerLtd Efficiently Re-investing Its Profits?

Zhejiang Cfmoto PowerLtd's three-year median payout ratio is a pretty moderate 27%, meaning the company retains 73% of its income. By the looks of it, the dividend is well covered and Zhejiang Cfmoto PowerLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Zhejiang Cfmoto PowerLtd is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 28%. Accordingly, forecasts suggest that Zhejiang Cfmoto PowerLtd's future ROE will be 23% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Zhejiang Cfmoto PowerLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.