Sinosteel Luonai Materials Technology's (SHSE:688119) stock is up by a considerable 7.8% over the past week. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to Sinosteel Luonai Materials Technology's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Sinosteel Luonai Materials Technology

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 Sinosteel Luonai Materials Technology is:

4.4% = CN¥139m ÷ CN¥3.1b (Based on the trailing twelve months to September 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¥0.04.

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 Sinosteel Luonai Materials Technology's Earnings Growth And 4.4% ROE

It is quite clear that Sinosteel Luonai Materials Technology's ROE is rather low. Not just that, even compared to the industry average of 6.8%, the company's ROE is entirely unremarkable. Therefore, the disappointing ROE therefore provides a background to Sinosteel Luonai Materials Technology's very little net income growth of 2.2% over the past five years.

We then compared Sinosteel Luonai Materials Technology's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 3.3% in the same 5-year period, which is a bit concerning.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 65% (that is, the company retains only 35% of its income) over the past three years for Sinosteel Luonai Materials Technology suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Summary

In total, we would have a hard think before deciding on any investment action concerning Sinosteel Luonai Materials Technology. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. Our risks dashboard would have the 3 risks we have identified for Sinosteel Luonai Materials Technology.

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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.