Does Foshan Electrical and Lighting Co.,Ltd's (SZSE:000541) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Most readers would already be aware that Foshan Electrical and LightingLtd's (SZSE:000541) stock increased significantly by 15% over the past month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study Foshan Electrical and LightingLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Foshan Electrical and LightingLtd

How To 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 Foshan Electrical and LightingLtd is:

4.0% = CN¥400m ÷ CN¥10.0b (Based on the trailing twelve months to September 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¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Foshan Electrical and LightingLtd's Earnings Growth And 4.0% ROE

As you can see, Foshan Electrical and LightingLtd's ROE looks pretty weak. Even when compared to the industry average of 6.5%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by Foshan Electrical and LightingLtd over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 10% over the last few years.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is 000541 worth today? The intrinsic value infographic in our free research report helps visualize whether 000541 is currently mispriced by the market.

Is Foshan Electrical and LightingLtd Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 55% (implying that the company keeps only 45% of its income) of its business to reinvest into its business), most of Foshan Electrical and LightingLtd's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Foshan Electrical and LightingLtd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, Foshan Electrical and LightingLtd's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.