With its stock down 12% over the past week, it is easy to disregard Zhejiang Yuejian Intelligent EquipmentLtd (SHSE:603095). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Zhejiang Yuejian Intelligent EquipmentLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Yuejian Intelligent EquipmentLtd is:

1.7% = CN¥43m ÷ CN¥2.5b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.02 in profit.

What Has ROE Got To Do With 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. 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.

A Side By Side comparison of Zhejiang Yuejian Intelligent EquipmentLtd's Earnings Growth And 1.7% ROE

It is hard to argue that Zhejiang Yuejian Intelligent EquipmentLtd's ROE is much good in and of itself. Even compared to the average industry ROE of 7.0%, the company's ROE is quite dismal. Thus, the low net income growth of 4.5% seen by Zhejiang Yuejian Intelligent EquipmentLtd over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Zhejiang Yuejian Intelligent EquipmentLtd's reported growth was lower than the industry growth of 8.7% over the last few years, which is not something we like to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Zhejiang Yuejian Intelligent EquipmentLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Zhejiang Yuejian Intelligent EquipmentLtd Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 33% (implying that the company retains the remaining 67% of its income), Zhejiang Yuejian Intelligent EquipmentLtd's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Zhejiang Yuejian Intelligent EquipmentLtd has paid dividends over a period of four years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we feel that the performance shown by Zhejiang Yuejian Intelligent EquipmentLtd can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Zhejiang Yuejian Intelligent EquipmentLtd visit our risks dashboard for free.

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.