Does Sublime China Information Co., Ltd.'s (SZSE:301299) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Sublime China Information (SZSE:301299) has had a great run on the share market with its stock up by a significant 16% over the last three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. In this article, we decided to focus on Sublime China Information's ROE.

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.

Check out our latest analysis for Sublime China Information

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 Sublime China Information is:

11% = CN¥64m ÷ CN¥609m (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.11 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Sublime China Information's Earnings Growth And 11% ROE

At first glance, Sublime China Information's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 7.4% which we definitely can't overlook. However, Sublime China Information's five year net income growth was quite low averaging at only 2.6%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay low.

Next, on comparing with the industry net income growth, we found that Sublime China Information's reported growth was lower than the industry growth of 3.5% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Sublime China Information fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sublime China Information Making Efficient Use Of Its Profits?

Sublime China Information has a very high three-year median payout ratio of 180%suggesting that the company's shareholders are getting paid from more than just the company's income. That's a huge risk in our books. You can see the 2 risks we have identified for Sublime China Information by visiting our risks dashboard for free on our platform here.

In addition, Sublime China Information only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Summary

On the whole, Sublime China Information's performance is quite a big let-down. The company has shown a disappointing growth in its earnings as a result of it retaining little to almost none of its profits. So, the decent ROE it does have, is not much useful to investors given that the company is reinvesting very little into its business. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Sublime China Information'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.