It is hard to get excited after looking at Liaoning Dingjide Petrochemical's (SHSE:603255) recent performance, when its stock has declined 9.0% over the past week. 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. Specifically, we decided to study Liaoning Dingjide Petrochemical's ROE in this article.
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 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 Liaoning Dingjide Petrochemical is:
4.6% = CN¥72m ÷ CN¥1.6b (Based on the trailing twelve months to September 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.
What Is The Relationship Between ROE And 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.
Liaoning Dingjide Petrochemical's Earnings Growth And 4.6% ROE
It is hard to argue that Liaoning Dingjide Petrochemical's ROE is much good in and of itself. Even compared to the average industry ROE of 7.1%, the company's ROE is quite dismal. Therefore, the disappointing ROE therefore provides a background to Liaoning Dingjide Petrochemical's very little net income growth of 2.1% over the past five years.
As a next step, we compared Liaoning Dingjide Petrochemical's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 12% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Liaoning Dingjide Petrochemical fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Liaoning Dingjide Petrochemical Efficiently Re-investing Its Profits?
A low three-year median payout ratio of 11% (implying that the company retains the remaining 89% of its income) suggests that Liaoning Dingjide Petrochemical is retaining most of its profits. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Additionally, Liaoning Dingjide Petrochemical started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.
Conclusion
Overall, we have mixed feelings about Liaoning Dingjide Petrochemical. 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. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 1 risk we have identified for Liaoning Dingjide Petrochemical 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.
