Zhejiang grandwall electric science&technologyltd (SHSE:603897) has had a great run on the share market with its stock up by a significant 11% over the last week. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Zhejiang grandwall electric science&technologyltd's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 grandwall electric science&technologyltd is:

10% = CN¥270m ÷ CN¥2.6b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.10 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 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 grandwall electric science&technologyltd's Earnings Growth And 10% ROE

On the face of it, Zhejiang grandwall electric science&technologyltd's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 6.9% doesn't go unnoticed by us. Still, Zhejiang grandwall electric science&technologyltd's net income growth of 2.6% over the past five years was mediocre at best. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the low earnings growth.

As a next step, we compared Zhejiang grandwall electric science&technologyltd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 12% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Zhejiang grandwall electric science&technologyltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang grandwall electric science&technologyltd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 91% (that is, the company retains only 9.1% of its income) over the past three years for Zhejiang grandwall electric science&technologyltd suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Moreover, Zhejiang grandwall electric science&technologyltd has been paying dividends for five years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Zhejiang grandwall electric science&technologyltd. The company has shown a disappointing growth in its earnings as a result of it retaining little to almost none of its profits. So, the decent ROE it does have, is not much useful to investors given that the company is reinvesting very little into its business. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. Our risks dashboard will have the 1 risk we have identified for Zhejiang grandwall electric science&technologyltd.

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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.