Shandong Gold Phoenix Co.,Ltd's (SHSE:603586) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Simply Wall St · Nov 9, 2023 07:50

Most readers would already be aware that Shandong Gold PhoenixLtd's (SHSE:603586) stock increased significantly by 15% over the past week. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Shandong Gold PhoenixLtd's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Shandong Gold PhoenixLtd

How To Calculate Return On Equity?

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 Shandong Gold PhoenixLtd is:

7.5% = CN¥168m ÷ CN¥2.2b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.08 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Shandong Gold PhoenixLtd's Earnings Growth And 7.5% ROE

On the face of it, Shandong Gold PhoenixLtd's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.4%. Still, Shandong Gold PhoenixLtd has seen a flat net income growth over the past five years. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

As a next step, we compared Shandong Gold PhoenixLtd's net income growth with the industry and discovered that the industry saw an average growth of 4.0% in the same period.

past-earnings-growth — SHSE:603586 Past Earnings Growth November 8th 2023

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Shandong Gold PhoenixLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shandong Gold PhoenixLtd Using Its Retained Earnings Effectively?

Shandong Gold PhoenixLtd has a high three-year median payout ratio of 71% (or a retention ratio of 29%), 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, Shandong Gold PhoenixLtd has been paying dividends over a period of five 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

Overall, we would be extremely cautious before making any decision on Shandong Gold PhoenixLtd. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Up till now, we've only made a short study of the company's growth data. You can do your own research on Shandong Gold PhoenixLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.