Most readers would already be aware that Poly Plastic Masterbatch (SuZhou)Ltd's (SZSE:300905) stock increased significantly by 17% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to Poly Plastic Masterbatch (SuZhou)Ltd's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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 Poly Plastic Masterbatch (SuZhou)Ltd is:

5.6% = CN¥104m ÷ CN¥1.9b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.

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. 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. 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.

Poly Plastic Masterbatch (SuZhou)Ltd's Earnings Growth And 5.6% ROE

When you first look at it, Poly Plastic Masterbatch (SuZhou)Ltd's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.2%. But Poly Plastic Masterbatch (SuZhou)Ltd saw a five year net income decline of 4.1% over the past five years. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

However, when we compared Poly Plastic Masterbatch (SuZhou)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 4.9% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Poly Plastic Masterbatch (SuZhou)Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Poly Plastic Masterbatch (SuZhou)Ltd Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 70% (implying that 30% of the profits are retained), most of Poly Plastic Masterbatch (SuZhou)Ltd's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 3 risks we have identified for Poly Plastic Masterbatch (SuZhou)Ltd.

In addition, Poly Plastic Masterbatch (SuZhou)Ltd has been paying dividends over a period of four years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

Overall, we would be extremely cautious before making any decision on Poly Plastic Masterbatch (SuZhou)Ltd. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Poly Plastic Masterbatch (SuZhou)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.