Sunshine Global CircuitsLtd's (SZSE:300739) stock is up by a considerable 13% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. Specifically, we decided to study Sunshine Global CircuitsLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Sunshine Global CircuitsLtd

How Is ROE Calculated?

ROE 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 Sunshine Global CircuitsLtd is:

7.7% = CN¥137m ÷ CN¥1.8b (Based on the trailing twelve months to March 2022).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Sunshine Global CircuitsLtd's Earnings Growth And 7.7% ROE

At first glance, Sunshine Global CircuitsLtd's ROE doesn't look very promising. However, its ROE is similar to the industry average of 8.9%, so we won't completely dismiss the company. Having said that, Sunshine Global CircuitsLtd's net income growth over the past five years is more or less flat. Bear in mind, the company's ROE is not very high. So that could also be one of the reasons behind the company's flat growth in earnings.

We then compared Sunshine Global CircuitsLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 15% in the same period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Sunshine Global CircuitsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sunshine Global CircuitsLtd Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 51% (implying that the company keeps only 49% of its income) of its business to reinvest into its business), most of Sunshine Global CircuitsLtd's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Sunshine Global CircuitsLtd has been paying dividends over a period of four years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we would be extremely cautious before making any decision on Sunshine Global CircuitsLtd. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Sunshine Global CircuitsLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.