Is Shenzhen Riland Industry Group Co., Ltd's (SZSE:300154) Stock On A Downtrend As A Result Of Its Poor Financials?

It is hard to get excited after looking at Shenzhen Riland Industry Group's (SZSE:300154) recent performance, when its stock has declined 14% over the past month. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Specifically, we decided to study Shenzhen Riland Industry Group'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.

View our latest analysis for Shenzhen Riland Industry Group

How Is ROE Calculated?

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 Shenzhen Riland Industry Group is:

5.0% = CN¥89m ÷ CN¥1.8b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 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. 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.

Shenzhen Riland Industry Group's Earnings Growth And 5.0% ROE

On the face of it, Shenzhen Riland Industry Group's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 6.8% either. As a result, Shenzhen Riland Industry Group's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Shenzhen Riland Industry Group's net income growth with the industry and discovered that the industry saw an average growth of 9.4% in the same period.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Shenzhen Riland Industry Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shenzhen Riland Industry Group Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 79% (implying that the company keeps only 21% of its income) of its business to reinvest into its business), most of Shenzhen Riland Industry Group's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Shenzhen Riland Industry Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, Shenzhen Riland Industry Group'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. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Shenzhen Riland Industry Group and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.