Are SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD's (SHSE:601399) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

It is hard to get excited after looking at SINOMACH HEAVY EQUIPMENT GROUPLTD's (SHSE:601399) recent performance, when its stock has declined 13% over the past three months. 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 SINOMACH HEAVY EQUIPMENT GROUPLTD's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD

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 SINOMACH HEAVY EQUIPMENT GROUPLTD is:

3.4% = CN¥512m ÷ CN¥15b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.03.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of SINOMACH HEAVY EQUIPMENT GROUPLTD's Earnings Growth And 3.4% ROE

As you can see, SINOMACH HEAVY EQUIPMENT GROUPLTD's ROE looks pretty weak. Even compared to the average industry ROE of 6.3%, the company's ROE is quite dismal. Therefore, SINOMACH HEAVY EQUIPMENT GROUPLTD's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared SINOMACH HEAVY EQUIPMENT GROUPLTD's net income growth with the industry and found that the average industry growth rate was 7.2% in the same 5-year 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). This then helps them determine if the stock is placed for a bright or bleak future. Is SINOMACH HEAVY EQUIPMENT GROUPLTD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is SINOMACH HEAVY EQUIPMENT GROUPLTD Making Efficient Use Of Its Profits?

SINOMACH HEAVY EQUIPMENT GROUPLTD doesn't pay any regular dividends, which means that it is retaining all of its earnings. This makes us question why the company is retaining so much of its profits and still generating almost no growth? So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Summary

Overall, we have mixed feelings about SINOMACH HEAVY EQUIPMENT GROUPLTD. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.