Does Tianjin LVYIN Landscape and Ecology Construction Co., Ltd's (SZSE:002887) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Tianjin LVYIN Landscape and Ecology Construction's (SZSE:002887) stock is up by a considerable 21% over the past week. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to Tianjin LVYIN Landscape and Ecology Construction's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Tianjin LVYIN Landscape and Ecology Construction

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Tianjin LVYIN Landscape and Ecology Construction is:

4.4% = CN¥106m ÷ CN¥2.4b (Based on the trailing twelve months to June 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¥0.04 in profit.

Why Is ROE Important For 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 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.

Tianjin LVYIN Landscape and Ecology Construction's Earnings Growth And 4.4% ROE

It is quite clear that Tianjin LVYIN Landscape and Ecology Construction's ROE is rather low. Even when compared to the industry average of 6.8%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 16% seen by Tianjin LVYIN Landscape and Ecology Construction over the last five years is not surprising. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

That being said, we compared Tianjin LVYIN Landscape and Ecology Construction's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 7.0% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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 Tianjin LVYIN Landscape and Ecology Construction fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tianjin LVYIN Landscape and Ecology Construction Using Its Retained Earnings Effectively?

Tianjin LVYIN Landscape and Ecology Construction has a high three-year median payout ratio of 70% (that is, it is retaining 30% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run.

Moreover, Tianjin LVYIN Landscape and Ecology Construction has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

On the whole, Tianjin LVYIN Landscape and Ecology Construction's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. 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.