It is hard to get excited after looking at SHENZHEN TOPRAYSOLARLtd's (SZSE:002218) recent performance, when its stock has declined 13% 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. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to SHENZHEN TOPRAYSOLARLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

How Do You Calculate Return On Equity?

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 SHENZHEN TOPRAYSOLARLtd is:

1.2% = CN¥50m ÷ CN¥4.2b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.01 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. 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 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 SHENZHEN TOPRAYSOLARLtd's Earnings Growth And 1.2% ROE

As you can see, SHENZHEN TOPRAYSOLARLtd's ROE looks pretty weak. Even when compared to the industry average of 6.4%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by SHENZHEN TOPRAYSOLARLtd 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 26% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is SHENZHEN TOPRAYSOLARLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is SHENZHEN TOPRAYSOLARLtd Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 37% (or a retention ratio of 63%), SHENZHEN TOPRAYSOLARLtd hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, SHENZHEN TOPRAYSOLARLtd has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we feel that the performance shown by SHENZHEN TOPRAYSOLARLtd can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into SHENZHEN TOPRAYSOLARLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.