Declining Stock and Decent Financials: Is The Market Wrong About Shandong Swan CottonIndustrial Machinery Stock Co.,Ltd. (SHSE:603029)?

Shandong Swan CottonIndustrial Machinery StockLtd (SHSE:603029) has had a rough three months with its share price down 14%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Shandong Swan CottonIndustrial Machinery StockLtd's ROE in this article.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Shandong Swan CottonIndustrial Machinery StockLtd

How To Calculate Return On Equity?

Return on equity 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 Shandong Swan CottonIndustrial Machinery StockLtd is:

7.8% = CN¥66m ÷ CN¥854m (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made 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. 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.

Shandong Swan CottonIndustrial Machinery StockLtd's Earnings Growth And 7.8% ROE

At first glance, Shandong Swan CottonIndustrial Machinery StockLtd's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.8%. Moreover, we are quite pleased to see that Shandong Swan CottonIndustrial Machinery StockLtd's net income grew significantly at a rate of 42% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Shandong Swan CottonIndustrial Machinery StockLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.5%.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 603029 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Shandong Swan CottonIndustrial Machinery StockLtd Efficiently Re-investing Its Profits?

The three-year median payout ratio for Shandong Swan CottonIndustrial Machinery StockLtd is 28%, which is moderately low. The company is retaining the remaining 72%. So it seems that Shandong Swan CottonIndustrial Machinery StockLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Shandong Swan CottonIndustrial Machinery StockLtd is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Conclusion

Overall, we feel that Shandong Swan CottonIndustrial Machinery StockLtd certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for Shandong Swan CottonIndustrial Machinery StockLtd by visiting our risks dashboard for free on our platform here.

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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.

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