Declining Stock and Decent Financials: Is The Market Wrong About Shandong Golden Empire Precision Machinery Technology Co., Ltd. (SHSE:603270)?

Shandong Golden Empire Precision Machinery Technology (SHSE:603270) has had a rough three months with its share price down 18%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Shandong Golden Empire Precision Machinery Technology's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Shandong Golden Empire Precision Machinery Technology

How Is ROE Calculated?

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 Shandong Golden Empire Precision Machinery Technology is:

6.0% = CN¥130m ÷ CN¥2.2b (Based on the trailing twelve months to March 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¥0.06 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Shandong Golden Empire Precision Machinery Technology's Earnings Growth And 6.0% ROE

On the face of it, Shandong Golden Empire Precision Machinery Technology's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.8%, we may spare it some thought. On the other hand, Shandong Golden Empire Precision Machinery Technology reported a moderate 13% net income growth over the past 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. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Shandong Golden Empire Precision Machinery Technology'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 9.4%.

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 Shandong Golden Empire Precision Machinery Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shandong Golden Empire Precision Machinery Technology Making Efficient Use Of Its Profits?

Shandong Golden Empire Precision Machinery Technology has a healthy combination of a moderate three-year median payout ratio of 29% (or a retention ratio of 71%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Summary

In total, it does look like Shandong Golden Empire Precision Machinery Technology has some positive aspects to its business. 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 Golden Empire Precision Machinery Technology 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.