Most readers would already be aware that Shenzhen SunXing Light Alloys MaterialsLtd's (SHSE:603978) stock increased significantly by 24% over the past month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Shenzhen SunXing Light Alloys MaterialsLtd's ROE today.
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 Shenzhen SunXing Light Alloys MaterialsLtd
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Shenzhen SunXing Light Alloys MaterialsLtd is:
2.6% = CN¥48m ÷ CN¥1.8b (Based on the trailing twelve months to March 2022).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.03.
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.
A Side By Side comparison of Shenzhen SunXing Light Alloys MaterialsLtd's Earnings Growth And 2.6% ROE
As you can see, Shenzhen SunXing Light Alloys MaterialsLtd's ROE looks pretty weak. Even compared to the average industry ROE of 9.3%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 26% seen by Shenzhen SunXing Light Alloys MaterialsLtd over the last five years is not surprising. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
However, when we compared Shenzhen SunXing Light Alloys MaterialsLtd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 17% in the same period. This is quite worrisome.SHSE:603978 Past Earnings Growth July 4th 2022
Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Shenzhen SunXing Light Alloys MaterialsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Shenzhen SunXing Light Alloys MaterialsLtd Efficiently Re- investing Its Profits?
While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.
Overall, we have mixed feelings about Shenzhen SunXing Light Alloys MaterialsLtd. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 4 risks we have identified for Shenzhen SunXing Light Alloys MaterialsLtd.
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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.