Rastar Environmental Protection MaterialsLtd (SZSE:300834) has had a rough three months with its share price down 18%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on Rastar Environmental Protection MaterialsLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Rastar Environmental Protection MaterialsLtd

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Rastar Environmental Protection MaterialsLtd is:

3.1% = CN¥92m ÷ CN¥3.0b (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¥0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Rastar Environmental Protection MaterialsLtd's Earnings Growth And 3.1% ROE

It is quite clear that Rastar Environmental Protection MaterialsLtd's ROE is rather low. Even compared to the average industry ROE of 6.9%, the company's ROE is quite dismal. Hence, the flat earnings seen by Rastar Environmental Protection MaterialsLtd over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 12% over the last few years.

Earnings growth is a huge factor in stock valuation. 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 Rastar Environmental Protection MaterialsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Rastar Environmental Protection MaterialsLtd Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 94% (meaning, the company retains only 5.7% of profits) for Rastar Environmental Protection MaterialsLtd suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Rastar Environmental Protection MaterialsLtd started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Summary

On the whole, Rastar Environmental Protection MaterialsLtd's performance is quite a big let-down. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. To gain further insights into Rastar Environmental Protection MaterialsLtd's past profit growth, check out this visualization 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.