Zhengzhou Coal Mining Machinery Group (HKG:564) has had a great run on the share market with its stock up by a significant 21% over the last week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Zhengzhou Coal Mining Machinery Group’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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
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 Zhengzhou Coal Mining Machinery Group is:
12% = CN¥1.8b ÷ CN¥15b (Based on the trailing twelve months to September 2021).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every HK$1 worth of shareholders’ equity, the company generated HK$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. 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.
A Side By Side comparison of Zhengzhou Coal Mining Machinery Group’s Earnings Growth And 12% ROE
To start with, Zhengzhou Coal Mining Machinery Group’s ROE looks acceptable. Further, the company’s ROE is similar to the industry average of 9.7%. Consequently, this likely laid the ground for the impressive net income growth of 39% seen over the past five years by Zhengzhou Coal Mining Machinery Group. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Zhengzhou Coal Mining Machinery Group’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 17% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Zhengzhou Coal Mining Machinery Group is trading on a high P/E or a low P/E, relative to its industry.
Is Zhengzhou Coal Mining Machinery Group Efficiently Re-investing Its Profits?
The three-year median payout ratio for Zhengzhou Coal Mining Machinery Group is 27%, which is moderately low. The company is retaining the remaining 73%. By the looks of it, the dividend is well covered and Zhengzhou Coal Mining Machinery Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Additionally, Zhengzhou Coal Mining Machinery Group has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.
In total, we are pretty happy with Zhengzhou Coal Mining Machinery Group’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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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.
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