Is Suzhou SONAVOX Electronics Co.,Ltd.'s (SHSE:688533) Recent Stock Performance Tethered To Its Strong Fundamentals?

Suzhou SONAVOX ElectronicsLtd (SHSE:688533) has had a great run on the share market with its stock up by a significant 10% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Suzhou SONAVOX ElectronicsLtd's ROE in this article.

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 Suzhou SONAVOX ElectronicsLtd

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 Suzhou SONAVOX ElectronicsLtd is:

16% = CN¥239m ÷ CN¥1.5b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.16 in profit.

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.

Suzhou SONAVOX ElectronicsLtd's Earnings Growth And 16% ROE

To begin with, Suzhou SONAVOX ElectronicsLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.5%. Probably as a result of this, Suzhou SONAVOX ElectronicsLtd was able to see an impressive net income growth of 28% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Suzhou SONAVOX ElectronicsLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.1%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Suzhou SONAVOX ElectronicsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Suzhou SONAVOX ElectronicsLtd Efficiently Re-investing Its Profits?

Suzhou SONAVOX ElectronicsLtd's three-year median payout ratio is a pretty moderate 27%, meaning the company retains 73% of its income. So it seems that Suzhou SONAVOX ElectronicsLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Suzhou SONAVOX ElectronicsLtd has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 28%. Regardless, the future ROE for Suzhou SONAVOX ElectronicsLtd is predicted to rise to 20% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that Suzhou SONAVOX ElectronicsLtd's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.