It is hard to get excited after looking at Shenzhen Prince New MaterialsLtd's (SZSE:002735) recent performance, when its stock has declined 24% over the past three months. 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. Specifically, we decided to study Shenzhen Prince New MaterialsLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You 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 Shenzhen Prince New MaterialsLtd is:

3.7% = CN¥74m ÷ CN¥2.0b (Based on the trailing twelve months to March 2024).

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¥0.04 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Shenzhen Prince New MaterialsLtd's Earnings Growth And 3.7% ROE

As you can see, Shenzhen Prince New MaterialsLtd's ROE looks pretty weak. Even when compared to the industry average of 5.6%, the ROE figure is pretty disappointing. As a result, Shenzhen Prince New MaterialsLtd's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Shenzhen Prince New MaterialsLtd's performance with the industry and found thatShenzhen Prince New MaterialsLtd's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 0.2% in the same period, which is a slower than the company.

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. Is Shenzhen Prince New MaterialsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shenzhen Prince New MaterialsLtd Making Efficient Use Of Its Profits?

Shenzhen Prince New MaterialsLtd's low three-year median payout ratio of 23% (implying that the company keeps77% of its income) should mean that the company is retaining most of its earnings to fuel its growth and this should be reflected in its growth number, but that's not the case.

In addition, Shenzhen Prince New MaterialsLtd has been paying dividends over a period of nine years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we feel that the performance shown by Shenzhen Prince New MaterialsLtd can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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