Sichuan Newsnet Media (Group)Ltd (SZSE:300987) has had a great run on the share market with its stock up by a significant 25% over the last three months. 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. In this article, we decided to focus on Sichuan Newsnet Media (Group)Ltd's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Is ROE Calculated?
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 Sichuan Newsnet Media (Group)Ltd is:
3.2% = CN¥26m ÷ CN¥788m (Based on the trailing twelve months to June 2024).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.03 in profit.
Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.
Sichuan Newsnet Media (Group)Ltd's Earnings Growth And 3.2% ROE
As you can see, Sichuan Newsnet Media (Group)Ltd's ROE looks pretty weak. Not just that, even compared to the industry average of 5.4%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 25% seen by Sichuan Newsnet Media (Group)Ltd over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.
However, when we compared Sichuan Newsnet Media (Group)Ltd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 2.3% in the same period. This is quite worrisome.
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. If you're wondering about Sichuan Newsnet Media (Group)Ltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Sichuan Newsnet Media (Group)Ltd Efficiently Re-investing Its Profits?
With a high three-year median payout ratio of 88% (implying that 12% of the profits are retained), most of Sichuan Newsnet Media (Group)Ltd's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 4 risks we have identified for Sichuan Newsnet Media (Group)Ltd visit our risks dashboard for free.
Additionally, Sichuan Newsnet Media (Group)Ltd started paying a dividend only recently. So it looks like the management may have perceived that shareholders favor dividends even though earnings have been in decline.
Summary
On the whole, Sichuan Newsnet Media (Group)Ltd's performance is quite a big let-down. 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 Sichuan Newsnet Media (Group)Ltd 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.
