Guangdong Shenling Environmental Systems Co., Ltd.'s (SZSE:301018) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 19% over the past three months, it is easy to disregard Guangdong Shenling Environmental Systems (SZSE:301018). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Guangdong Shenling Environmental Systems' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Guangdong Shenling Environmental Systems

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Guangdong Shenling Environmental Systems is:

4.4% = CN¥111m ÷ CN¥2.5b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 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 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.

A Side By Side comparison of Guangdong Shenling Environmental Systems' Earnings Growth And 4.4% ROE

It is quite clear that Guangdong Shenling Environmental Systems' ROE is rather low. Even compared to the average industry ROE of 8.3%, the company's ROE is quite dismal. Accordingly, Guangdong Shenling Environmental Systems' low net income growth of 3.4% over the past five years can possibly be explained by the low ROE amongst other factors.

We then performed a comparison between Guangdong Shenling Environmental Systems' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 4.2% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 301018 worth today? The intrinsic value infographic in our free research report helps visualize whether 301018 is currently mispriced by the market.

Is Guangdong Shenling Environmental Systems Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 29% (implying that the company retains the remaining 71% of its income), Guangdong Shenling Environmental Systems' earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Guangdong Shenling Environmental Systems has paid dividends over a period of three years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 25%. However, Guangdong Shenling Environmental Systems' ROE is predicted to rise to 13% despite there being no anticipated change in its payout ratio.

Conclusion

In total, it does look like Guangdong Shenling Environmental Systems has some positive aspects to its business. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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