SINOMACH HEAVY EQUIPMENT GROUP CO.,LTD (SHSE:601399) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Most readers would already be aware that SINOMACH HEAVY EQUIPMENT GROUPLTD's (SHSE:601399) stock increased significantly by 28% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on SINOMACH HEAVY EQUIPMENT GROUPLTD's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

SINOMACH HEAVY EQUIPMENT GROUPLTD's Earnings Growth And 3.4% ROE

It is quite clear that SINOMACH HEAVY EQUIPMENT GROUPLTD's ROE is rather low. Even when compared to the industry average of 6.3%, the ROE figure is pretty disappointing. 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 7.3% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 SINOMACH HEAVY EQUIPMENT GROUPLTD is trading on a high P/E or a low P/E, relative to its industry.

Is SINOMACH HEAVY EQUIPMENT GROUPLTD Efficiently Re-investing 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.

Conclusion

In total, we're a bit ambivalent about SINOMACH HEAVY EQUIPMENT GROUPLTD's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.