Silvery Dragon Prestressed MaterialsLTD Tianjin's (SHSE:603969) stock is up by a considerable 35% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Silvery Dragon Prestressed MaterialsLTD Tianjin'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You 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 Silvery Dragon Prestressed MaterialsLTD Tianjin is:

10.0% = CN¥238m ÷ CN¥2.4b (Based on the trailing twelve months to September 2024).

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¥0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Silvery Dragon Prestressed MaterialsLTD Tianjin's Earnings Growth And 10.0% ROE

At first glance, Silvery Dragon Prestressed MaterialsLTD Tianjin's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 7.7%, is definitely interesting. However, Silvery Dragon Prestressed MaterialsLTD Tianjin has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to stay flat.

As a next step, we compared Silvery Dragon Prestressed MaterialsLTD Tianjin'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 10% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Silvery Dragon Prestressed MaterialsLTD Tianjin's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Silvery Dragon Prestressed MaterialsLTD Tianjin Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 35% (implying that the company keeps 65% of its income) over the last three years, Silvery Dragon Prestressed MaterialsLTD Tianjin has seen a negligible amount of growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Silvery Dragon Prestressed MaterialsLTD Tianjin 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 do feel that Silvery Dragon Prestressed MaterialsLTD Tianjin has some positive attributes. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. Up till now, we've only made a short study of the company's growth data. To gain further insights into Silvery Dragon Prestressed MaterialsLTD Tianjin'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.