Is Zhengzhou Coal Mining Machinery Group Company Limited (HKG: 564) Stock Released by Strong Financial Data?
Zhengzhou Coal Mining Machinery Group (HKG: 564) had a strong performance in the equity market with a significant increase in its shares of 21% over the past week. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In particular, we will pay special attention to the ROE of Zhengzhou Coal Mining Machinery Group today.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for Zhengzhou Coal Mining Machinery Group
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Zhengzhou Coal Mining Machinery Group is:
12% = CN ¥ 1.8b ÷ CN ¥ 15b (Based on the last twelve months up to September 2021).
The “return” is the amount earned after tax over the past twelve months. This means that for every HK $ 1 worth of equity, the company generated HK $ 0.12 in profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess the profits that the company is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the company. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Zhengzhou Coal Mining Machinery Group’s profit growth and 12% ROE
For starters, the ROE of Zhengzhou Coal Mining Machinery Group seems acceptable. Additionally, the company’s ROE is similar to the industry average of 9.7%. Therefore, this likely laid the foundation for the impressive 39% net income growth seen over the past five years by the Zhengzhou Coal Mining Machinery Group. However, other drivers could also be behind this growth. For example, the business has a low payout ratio or is managed efficiently.
We then compared the net income growth of Zhengzhou Coal Mining Machinery Group with the industry and we are delighted to see that the growth figure of the company is higher than that of the industry which has a growth rate of 17% over the same period.
Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. A 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 outlook. So, you might want to check whether Zhengzhou Coal Mining Machinery Group is trading high P / E or low P / E, relative to its industry.
Is Zhengzhou Coal Mining Machinery Group Efficiently Reinvesting Profits?
The three-year median payout rate for Zhengzhou Coal Mining Machinery Group is 27%, which is moderately low. The company retains the remaining 73%. At first glance, the dividend is well hedged and Zhengzhou Coal Mining Machinery Group is effectively reinvesting its profits as evidenced by its exceptional growth which we discussed above.
In addition, Zhengzhou Coal Mining Machinery Group has paid dividends over a period of eight years, which means the company is very serious about sharing its profits with its shareholders.
All in all, we are quite satisfied with the performance of the Zhengzhou Coal Mining Machinery group. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive profit growth. Looking at current analysts’ estimates, we found that analysts expect the company to continue its recent streak of growth. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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