With its stock down 17% over the past three months, it is easy to disregard Suzhou Future Electrical Company (SZSE:301386). Given that stock prices are usually driven by a company's fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Suzhou Future Electrical Company'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Suzhou Future Electrical Company
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 Suzhou Future Electrical Company is:
5.9% = CN¥92m ÷ CN¥1.5b (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.06 in profit.
Why Is ROE Important For 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.
A Side By Side comparison of Suzhou Future Electrical Company's Earnings Growth And 5.9% ROE
At first glance, Suzhou Future Electrical Company's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 7.2%, we may spare it some thought. We can see that Suzhou Future Electrical Company has grown at a five year net income growth average rate of 4.2%, which is a bit on the lower side. 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.
We then compared Suzhou Future Electrical Company's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 14% in the same 5-year period, which is a bit concerning.
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. Is Suzhou Future Electrical Company fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Suzhou Future Electrical Company Efficiently Re-investing Its Profits?
With a high three-year median payout ratio of 51% (or a retention ratio of 49%), most of Suzhou Future Electrical Company's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
In addition, Suzhou Future Electrical Company only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.
Conclusion
Overall, we would be extremely cautious before making any decision on Suzhou Future Electrical Company. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. To know the 1 risk we have identified for Suzhou Future Electrical Company 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.
