Is Wuxi New Hongtai Electrical Technology Co.,Ltd's (SHSE:603016) Recent Performance Underpinned By Weak Financials?

Simply Wall St · Jun 2, 2023 06:15

With its stock down 9.9% over the past week, it is easy to disregard Wuxi New Hongtai Electrical TechnologyLtd (SHSE:603016). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Wuxi New Hongtai Electrical TechnologyLtd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Wuxi New Hongtai Electrical 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 Wuxi New Hongtai Electrical TechnologyLtd is:

8.8% = CN¥76m ÷ CN¥858m (Based on the trailing twelve months to March 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¥0.09 in profit.

What Has ROE Got To Do With 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. 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.

Wuxi New Hongtai Electrical TechnologyLtd's Earnings Growth And 8.8% ROE

When you first look at it, Wuxi New Hongtai Electrical TechnologyLtd's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.9%. On the other hand, Wuxi New Hongtai Electrical TechnologyLtd reported a fairly low 3.0% net income growth over the past five years. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.

Next, on comparing with the industry net income growth, we found that Wuxi New Hongtai Electrical TechnologyLtd's reported growth was lower than the industry growth of 14% in the same period, which is not something we like to see.

past-earnings-growth — SHSE:603016 Past Earnings Growth June 1st 2023

Earnings growth is a huge factor in stock valuation. 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 Wuxi New Hongtai Electrical TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wuxi New Hongtai Electrical TechnologyLtd Making Efficient Use Of Its Profits?

Wuxi New Hongtai Electrical TechnologyLtd's very high three-year median payout ratio of 130% suggests that the company is paying its shareholders more than what it is earning and it definitely contributes to the low earnings growth seen by the company. This is quite a risky position to be in. You can see the 2 risks we have identified for Wuxi New Hongtai Electrical TechnologyLtd by visiting our risks dashboard for free on our platform here.

In addition, Wuxi New Hongtai Electrical TechnologyLtd has been paying dividends over a period of six years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we would be extremely cautious before making any decision on Wuxi New Hongtai Electrical TechnologyLtd. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Wuxi New Hongtai Electrical TechnologyLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.