Most readers would already be aware that Shanghai Menon Animal Nutrition Technology's (SZSE:301156) stock increased significantly by 34% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Shanghai Menon Animal Nutrition Technology's ROE.

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?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Shanghai Menon Animal Nutrition Technology is:

7.9% = CN¥63m ÷ CN¥803m (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 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. 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.

Shanghai Menon Animal Nutrition Technology's Earnings Growth And 7.9% ROE

On the face of it, Shanghai Menon Animal Nutrition Technology's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 8.1%, we may spare it some thought. Having said that, Shanghai Menon Animal Nutrition Technology has shown a meagre net income growth of 4.0% over the past five years. Bear in mind, the company's ROE is not very high . Hence, this does provide some context to low earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Shanghai Menon Animal Nutrition Technology's growth is quite high when compared to the industry average growth of 2.9% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shanghai Menon Animal Nutrition Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shanghai Menon Animal Nutrition Technology Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 82% (that is, the company retains only 18% of its income) over the past three years for Shanghai Menon Animal Nutrition Technology suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Shanghai Menon Animal Nutrition Technology started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Summary

Overall, we feel that Shanghai Menon Animal Nutrition Technology certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. 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. To know the 2 risks we have identified for Shanghai Menon Animal Nutrition Technology visit our risks dashboard for free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com