Shandong Swan CottonIndustrial Machinery Stock Co.,Ltd.'s (SHSE:603029) Stock Is Going Strong: Have Financials A Role To Play?

Simply Wall St · Feb 4, 2023 08:10

Shandong Swan CottonIndustrial Machinery StockLtd (SHSE:603029) has had a great run on the share market with its stock up by a significant 48% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Shandong Swan CottonIndustrial Machinery StockLtd's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Shandong Swan CottonIndustrial Machinery StockLtd

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shandong Swan CottonIndustrial Machinery StockLtd is:

5.7% = CN¥43m ÷ CN¥755m (Based on the trailing twelve months to September 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¥0.06.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Shandong Swan CottonIndustrial Machinery StockLtd's Earnings Growth And 5.7% ROE

When you first look at it, Shandong Swan CottonIndustrial Machinery StockLtd's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 7.9% either. In spite of this, Shandong Swan CottonIndustrial Machinery StockLtd was able to grow its net income considerably, at a rate of 33% in the last five years. Therefore, there could be other reasons behind this growth. 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.

Next, on comparing with the industry net income growth, we found that Shandong Swan CottonIndustrial Machinery StockLtd's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

past-earnings-growth — SHSE:603029 Past Earnings Growth February 3rd 2023

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Shandong Swan CottonIndustrial Machinery StockLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shandong Swan CottonIndustrial Machinery StockLtd Making Efficient Use Of Its Profits?

Shandong Swan CottonIndustrial Machinery StockLtd's three-year median payout ratio is a pretty moderate 40%, meaning the company retains 60% of its income. So it seems that Shandong Swan CottonIndustrial Machinery StockLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Shandong Swan CottonIndustrial Machinery StockLtd has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we feel that Shandong Swan CottonIndustrial Machinery StockLtd certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Shandong Swan CottonIndustrial Machinery StockLtd.

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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.