Shandong Sacred Sun Power Sources Co.,Ltd's (SZSE:002580) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Shandong Sacred Sun Power SourcesLtd (SZSE:002580) has had a rough month with its share price down 15%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Shandong Sacred Sun Power SourcesLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Shandong Sacred Sun Power SourcesLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shandong Sacred Sun Power SourcesLtd is:

7.8% = CN¥173m ÷ CN¥2.2b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 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. 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 Sacred Sun Power SourcesLtd's Earnings Growth And 7.8% ROE

When you first look at it, Shandong Sacred Sun Power SourcesLtd's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 6.9%, we may spare it some thought. Looking at Shandong Sacred Sun Power SourcesLtd's exceptional 52% five-year net income growth in particular, we are definitely impressed. 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 example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Shandong Sacred Sun Power SourcesLtd's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Shandong Sacred Sun Power SourcesLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Shandong Sacred Sun Power SourcesLtd Efficiently Re-investing Its Profits?

Shandong Sacred Sun Power SourcesLtd's ' three-year median payout ratio is on the lower side at 15% implying that it is retaining a higher percentage (85%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Shandong Sacred Sun Power SourcesLtd is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

On the whole, we do feel that Shandong Sacred Sun Power SourcesLtd has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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 1 risk we have identified for Shandong Sacred Sun Power SourcesLtd 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.