Should Weakness in ShanDongDenghai Seeds Co.,Ltd's (SZSE:002041) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Simply Wall St · Jan 5 21:35

ShanDongDenghai SeedsLtd (SZSE:002041) has had a rough month with its share price down 14%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to ShanDongDenghai SeedsLtd's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for ShanDongDenghai SeedsLtd

How To 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 ShanDongDenghai SeedsLtd is:

7.7% = CN¥283m ÷ CN¥3.7b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

ShanDongDenghai SeedsLtd's Earnings Growth And 7.7% ROE

At first glance, ShanDongDenghai SeedsLtd's ROE doesn't look very promising. However, its ROE is similar to the industry average of 8.5%, so we won't completely dismiss the company. Particularly, the exceptional 38% net income growth seen by ShanDongDenghai SeedsLtd over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared ShanDongDenghai SeedsLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.3% in the same 5-year period.

past-earnings-growth — SZSE:002041 Past Earnings Growth January 6th 2024

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about ShanDongDenghai SeedsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is ShanDongDenghai SeedsLtd Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. This is likely what's driving the high earnings growth number discussed above.

Conclusion

In total, it does look like ShanDongDenghai SeedsLtd has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.