Is Weakness In Zhejiang Sunoren Solar Technology Co.,Ltd. (SHSE:603105) Stock A Sign That The Market Could Be Wrong Given Its Strong Financial Prospects?

Simply Wall St · Nov 30, 2023 17:27

It is hard to get excited after looking at Zhejiang Sunoren Solar TechnologyLtd's (SHSE:603105) recent performance, when its stock has declined 16% over the past three months. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Zhejiang Sunoren Solar TechnologyLtd's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Zhejiang Sunoren Solar TechnologyLtd

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 Zhejiang Sunoren Solar TechnologyLtd is:

11% = CN¥216m ÷ CN¥1.9b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.11 in profit.

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 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.

A Side By Side comparison of Zhejiang Sunoren Solar TechnologyLtd's Earnings Growth And 11% ROE

To start with, Zhejiang Sunoren Solar TechnologyLtd's ROE looks acceptable. On comparing with the average industry ROE of 6.1% the company's ROE looks pretty remarkable. This certainly adds some context to Zhejiang Sunoren Solar TechnologyLtd's exceptional 30% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Zhejiang Sunoren Solar TechnologyLtd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 27% in the same period.

past-earnings-growth — SHSE:603105 Past Earnings Growth November 30th 2023

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Zhejiang Sunoren Solar TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Sunoren Solar TechnologyLtd Making Efficient Use Of Its Profits?

Zhejiang Sunoren Solar TechnologyLtd's three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. So it seems that Zhejiang Sunoren Solar TechnologyLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Zhejiang Sunoren Solar TechnologyLtd has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 40% over the next three years. Regardless, the future ROE for Zhejiang Sunoren Solar TechnologyLtd is speculated to rise to 16% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

In total, we are pretty happy with Zhejiang Sunoren Solar TechnologyLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.