Qinhuangdao Tianqin Equipment Manufacturing Co.,Ltd.'s (SZSE:300922) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

Qinhuangdao Tianqin Equipment ManufacturingLtd (SZSE:300922) has had a great run on the share market with its stock up by a significant 12% over the last week. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Qinhuangdao Tianqin Equipment ManufacturingLtd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Qinhuangdao Tianqin Equipment ManufacturingLtd

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 Qinhuangdao Tianqin Equipment ManufacturingLtd is:

4.7% = CN¥41m ÷ CN¥882m (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Qinhuangdao Tianqin Equipment ManufacturingLtd's Earnings Growth And 4.7% ROE

It is hard to argue that Qinhuangdao Tianqin Equipment ManufacturingLtd's ROE is much good in and of itself. Not just that, even compared to the industry average of 5.9%, the company's ROE is entirely unremarkable. For this reason, Qinhuangdao Tianqin Equipment ManufacturingLtd's five year net income decline of 16% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared Qinhuangdao Tianqin Equipment ManufacturingLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 11% over the last few years.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Qinhuangdao Tianqin Equipment ManufacturingLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Qinhuangdao Tianqin Equipment ManufacturingLtd Using Its Retained Earnings Effectively?

Qinhuangdao Tianqin Equipment ManufacturingLtd has a high three-year median payout ratio of 63% (that is, it is retaining 37% 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. You can see the 2 risks we have identified for Qinhuangdao Tianqin Equipment ManufacturingLtd by visiting our risks dashboard for free on our platform here.

Moreover, Qinhuangdao Tianqin Equipment ManufacturingLtd has been paying dividends for four 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.

Conclusion

Overall, we would be extremely cautious before making any decision on Qinhuangdao Tianqin Equipment ManufacturingLtd. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Qinhuangdao Tianqin Equipment ManufacturingLtd's past profit growth, check out this visualization 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.