Most readers would already be aware that Zhejiang Shuanghuan DrivelineLtd's (SZSE:002472) stock increased significantly by 32% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Zhejiang Shuanghuan DrivelineLtd's ROE.
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 Is ROE Calculated?
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 Shuanghuan DrivelineLtd is:
11% = CN¥987m ÷ CN¥8.9b (Based on the trailing twelve months to September 2024).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.11 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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.
Zhejiang Shuanghuan DrivelineLtd's Earnings Growth And 11% ROE
To start with, Zhejiang Shuanghuan DrivelineLtd's ROE looks acceptable. On comparing with the average industry ROE of 8.3% the company's ROE looks pretty remarkable. Probably as a result of this, Zhejiang Shuanghuan DrivelineLtd was able to see an impressive net income growth of 50% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. 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 Shuanghuan DrivelineLtd'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 9.2%.
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for 002472? You can find out in our latest intrinsic value infographic research report.
Is Zhejiang Shuanghuan DrivelineLtd Using Its Retained Earnings Effectively?
Zhejiang Shuanghuan DrivelineLtd has a really low three-year median payout ratio of 11%, meaning that it has the remaining 89% left over to reinvest into its business. So it looks like Zhejiang Shuanghuan DrivelineLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Zhejiang Shuanghuan DrivelineLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 16% over the next three years. However, Zhejiang Shuanghuan DrivelineLtd's future ROE is expected to rise to 13% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.
Conclusion
Overall, we are quite pleased with Zhejiang Shuanghuan DrivelineLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
