It is hard to get excited after looking at Sinosteel Luonai Materials Technology's (SHSE:688119) recent performance, when its stock has declined 22% over the past three months. 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 Sinosteel Luonai Materials Technology's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How To Calculate Return On Equity?
Return on equity 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 Sinosteel Luonai Materials Technology is:
2.2% = CN¥70m ÷ CN¥3.1b (Based on the trailing twelve months to December 2023).
The 'return' is the profit 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¥0.02.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Sinosteel Luonai Materials Technology's Earnings Growth And 2.2% ROE
As you can see, Sinosteel Luonai Materials Technology's ROE looks pretty weak. Even compared to the average industry ROE of 6.6%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 5.5% seen by Sinosteel Luonai Materials Technology over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate of 0.6% over the last few years, we found that Sinosteel Luonai Materials Technology's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Sinosteel Luonai Materials Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Sinosteel Luonai Materials Technology Making Efficient Use Of Its Profits?
Sinosteel Luonai Materials Technology has a high three-year median payout ratio of 65% (that is, it is retaining 35% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 3 risks we have identified for Sinosteel Luonai Materials Technology visit our risks dashboard for free.
Only recently, Sinosteel Luonai Materials Technology stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends.
Conclusion
On the whole, Sinosteel Luonai Materials Technology's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Sinosteel Luonai Materials Technology's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.