Zhejiang Rongsheng Environmental Protection Paper Joint Stock Co., Ltd. (SHSE:603165) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

Simply Wall St · Feb 4 09:22

It is hard to get excited after looking at Zhejiang Rongsheng Environmental Protection Paper's (SHSE:603165) recent performance, when its stock has declined 26% over the past three months. 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 Zhejiang Rongsheng Environmental Protection Paper'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Zhejiang Rongsheng Environmental Protection Paper is:

12% = CN¥255m ÷ CN¥2.2b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.12.

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. 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 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.

A Side By Side comparison of Zhejiang Rongsheng Environmental Protection Paper's Earnings Growth And 12% ROE

To start with, Zhejiang Rongsheng Environmental Protection Paper's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 3.9%. Given the circumstances, we can't help but wonder why Zhejiang Rongsheng Environmental Protection Paper saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Zhejiang Rongsheng Environmental Protection Paper's net income growth with the industry and found that the average industry growth rate was 7.7% in the same 5-year period.

past-earnings-growth — SHSE:603165 Past Earnings Growth February 4th 2024

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). 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 Zhejiang Rongsheng Environmental Protection Paper's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhejiang Rongsheng Environmental Protection Paper Using Its Retained Earnings Effectively?

Zhejiang Rongsheng Environmental Protection Paper has a high three-year median payout ratio of 57% (or a retention ratio of 43%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

In addition, Zhejiang Rongsheng Environmental Protection Paper has been paying dividends over a period of seven years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 33% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 17%, over the same period.

Conclusion

Overall, we feel that Zhejiang Rongsheng Environmental Protection Paper certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.