Weak Financial Prospects Seem To Be Dragging Down Shiyan Taixiang Industry Co.,Ltd. (SZSE:301192) Stock

With its stock down 18% over the past month, it is easy to disregard Shiyan Taixiang IndustryLtd (SZSE:301192). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. In this article, we decided to focus on Shiyan Taixiang IndustryLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Shiyan Taixiang IndustryLtd

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shiyan Taixiang IndustryLtd is:

8.0% = CN¥48m ÷ CN¥598m (Based on the trailing twelve months to September 2024).

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¥0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Shiyan Taixiang IndustryLtd's Earnings Growth And 8.0% ROE

On the face of it, Shiyan Taixiang IndustryLtd's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.3%. Having said that, Shiyan Taixiang IndustryLtd's five year net income decline rate was 16%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

However, when we compared Shiyan Taixiang IndustryLtd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 9.2% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Shiyan Taixiang IndustryLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Shiyan Taixiang IndustryLtd Efficiently Re-investing Its Profits?

Shiyan Taixiang IndustryLtd's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 59% (or a retention ratio of 41%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.

Only recently, Shiyan Taixiang IndustryLtd stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends.

Conclusion

Overall, we would be extremely cautious before making any decision on Shiyan Taixiang IndustryLtd. 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. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Shiyan Taixiang IndustryLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.