San Yang Ma (Chongqing) Logistics Co.,Ltd.'s (SZSE:001317) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Simply Wall St · Aug 18, 2023 18:34

San Yang Ma (Chongqing) LogisticsLtd (SZSE:001317) has had a great run on the share market with its stock up by a significant 13% over the last week. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on San Yang Ma (Chongqing) LogisticsLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for San Yang Ma (Chongqing) LogisticsLtd

How Do You Calculate Return On Equity?

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 San Yang Ma (Chongqing) LogisticsLtd is:

1.9% = CN¥16m ÷ CN¥805m (Based on the trailing twelve months to March 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.02 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

San Yang Ma (Chongqing) LogisticsLtd's Earnings Growth And 1.9% ROE

It is hard to argue that San Yang Ma (Chongqing) LogisticsLtd's ROE is much good in and of itself. Even compared to the average industry ROE of 8.7%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 18% seen by San Yang Ma (Chongqing) LogisticsLtd over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

So, as a next step, we compared San Yang Ma (Chongqing) LogisticsLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 17% over the last few years.

past-earnings-growth — SZSE:001317 Past Earnings Growth August 18th 2023

Earnings growth is an important metric to consider when valuing a stock. 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 San Yang Ma (Chongqing) LogisticsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is San Yang Ma (Chongqing) LogisticsLtd Efficiently Re-investing Its Profits?

San Yang Ma (Chongqing) LogisticsLtd has a high three-year median payout ratio of 52% (that is, it is retaining 48% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 3 risks we have identified for San Yang Ma (Chongqing) LogisticsLtd by visiting our risks dashboard for free on our platform here.

Additionally, San Yang Ma (Chongqing) LogisticsLtd started paying a dividend only recently. So it looks like the management may have perceived that shareholders favor dividends even though earnings have been in decline.

Summary

On the whole, San Yang Ma (Chongqing) LogisticsLtd's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on San Yang Ma (Chongqing) LogisticsLtd and see how it has performed in the past by looking at this FREE detailed graph 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.