Is SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD's (SHSE:601399) Recent Price Movement Underpinned By Its Weak Fundamentals?

Simply Wall St · Oct 20, 2023 07:40

With its stock down 5.2% over the past month, it is easy to disregard SINOMACH HEAVY EQUIPMENT GROUPLTD (SHSE:601399). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on SINOMACH HEAVY EQUIPMENT GROUPLTD's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD

How Is ROE Calculated?

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 SINOMACH HEAVY EQUIPMENT GROUPLTD is:

3.2% = CN¥454m ÷ CN¥14b (Based on the trailing twelve months to June 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.03 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. 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.

A Side By Side comparison of SINOMACH HEAVY EQUIPMENT GROUPLTD's Earnings Growth And 3.2% ROE

It is quite clear that SINOMACH HEAVY EQUIPMENT GROUPLTD's ROE is rather low. Not just that, even compared to the industry average of 7.9%, the company's ROE is entirely unremarkable. For this reason, SINOMACH HEAVY EQUIPMENT GROUPLTD's five year net income decline of 3.4% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

That being said, we compared SINOMACH HEAVY EQUIPMENT GROUPLTD's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 11% in the same 5-year period.

past-earnings-growth — SHSE:601399 Past Earnings Growth October 19th 2023

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if SINOMACH HEAVY EQUIPMENT GROUPLTD is trading on a high P/E or a low P/E, relative to its industry.

Is SINOMACH HEAVY EQUIPMENT GROUPLTD Making Efficient Use Of Its Profits?

SINOMACH HEAVY EQUIPMENT GROUPLTD doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Conclusion

Overall, we have mixed feelings about SINOMACH HEAVY EQUIPMENT GROUPLTD. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 1 risk we have identified for SINOMACH HEAVY EQUIPMENT GROUPLTD by visiting our risks dashboard for free on our platform here.

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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.