With its stock down 9.6% over the past month, it is easy to disregard Zhuzhou CRRC Times Electric (HKG:3898). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Zhuzhou CRRC Times Electric's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 Zhuzhou CRRC Times Electric is:
8.8% = CN¥3.9b ÷ CN¥45b (Based on the trailing twelve months to December 2024).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.09 in profit.
View our latest analysis for Zhuzhou CRRC Times Electric
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Zhuzhou CRRC Times Electric's Earnings Growth And 8.8% ROE
When you first look at it, Zhuzhou CRRC Times Electric's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 8.4%, we may spare it some thought. Having said that, Zhuzhou CRRC Times Electric has shown a modest net income growth of 8.5% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Zhuzhou CRRC Times Electric's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 8.5% over the last few years.
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. Is Zhuzhou CRRC Times Electric fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Zhuzhou CRRC Times Electric Efficiently Re-investing Its Profits?
Zhuzhou CRRC Times Electric has a healthy combination of a moderate three-year median payout ratio of 31% (or a retention ratio of 69%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Zhuzhou CRRC Times Electric has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 39% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.
Summary
In total, it does look like Zhuzhou CRRC Times Electric has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable 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.
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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.