Rongcheer Industrial Technology (Suzhou) Co., Ltd. (SZSE:301360) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

With its stock down 31% over the past three months, it is easy to disregard Rongcheer Industrial Technology (Suzhou) (SZSE:301360). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Rongcheer Industrial Technology (Suzhou)'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.

See our latest analysis for Rongcheer Industrial Technology (Suzhou)

How To Calculate Return On Equity?

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 Rongcheer Industrial Technology (Suzhou) is:

4.0% = CN¥46m ÷ CN¥1.1b (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¥0.04 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Rongcheer Industrial Technology (Suzhou)'s Earnings Growth And 4.0% ROE

As you can see, Rongcheer Industrial Technology (Suzhou)'s ROE looks pretty weak. Even when compared to the industry average of 6.8%, the ROE figure is pretty disappointing. Rongcheer Industrial Technology (Suzhou) was still able to see a decent net income growth of 8.3% over the past five years. We reckon that there could be other factors at play here. 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 Rongcheer Industrial Technology (Suzhou)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 9.4% over the last few years.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Rongcheer Industrial Technology (Suzhou)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Rongcheer Industrial Technology (Suzhou) Efficiently Re-investing Its Profits?

Rongcheer Industrial Technology (Suzhou) has a three-year median payout ratio of 34%, which implies that it retains the remaining 66% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Conclusion

Overall, we feel that Rongcheer Industrial Technology (Suzhou) certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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. To know the 2 risks we have identified for Rongcheer Industrial Technology (Suzhou) visit our risks dashboard for free.

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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.