It is hard to get excited after looking at Zhe Kuang Heavy IndustryLtd's (SZSE:300837) recent performance, when its stock has declined 28% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Zhe Kuang Heavy IndustryLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Zhe Kuang Heavy IndustryLtd is:

12% = CN¥176m ÷ CN¥1.4b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Zhe Kuang Heavy IndustryLtd's Earnings Growth And 12% ROE

At first glance, Zhe Kuang Heavy IndustryLtd seems to have a decent ROE. Especially when compared to the industry average of 7.6% the company's ROE looks pretty impressive. Probably as a result of this, Zhe Kuang Heavy IndustryLtd was able to see a decent growth of 18% over the last five years.

As a next step, we compared Zhe Kuang Heavy IndustryLtd'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 12%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Zhe Kuang Heavy IndustryLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhe Kuang Heavy IndustryLtd Using Its Retained Earnings Effectively?

In Zhe Kuang Heavy IndustryLtd's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 18% (or a retention ratio of 82%), which suggests that the company is investing most of its profits to grow its business.

Besides, Zhe Kuang Heavy IndustryLtd has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with Zhe Kuang Heavy IndustryLtd'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.

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