Suzhou SONAVOX Electronics Co.,Ltd.'s (SHSE:688533) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Suzhou SONAVOX ElectronicsLtd's (SHSE:688533) recent performance, when its stock has declined 13% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Suzhou SONAVOX ElectronicsLtd

How Do You 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 Suzhou SONAVOX ElectronicsLtd is:

14% = CN¥187m ÷ CN¥1.4b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax 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¥0.14 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.

Suzhou SONAVOX ElectronicsLtd's Earnings Growth And 14% ROE

To start with, Suzhou SONAVOX ElectronicsLtd's ROE looks acceptable. Especially when compared to the industry average of 9.8% the company's ROE looks pretty impressive. Probably as a result of this, Suzhou SONAVOX ElectronicsLtd was able to see an impressive net income growth of 22% over the last five years. We reckon that there could also 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 with the industry net income growth, we found that Suzhou SONAVOX ElectronicsLtd's growth is quite high when compared to the industry average growth of 5.7% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. 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 Making Efficient Use Of Its Profits?

Suzhou SONAVOX ElectronicsLtd's three-year median payout ratio is a pretty moderate 28%, meaning the company retains 72% 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.

While Suzhou SONAVOX ElectronicsLtd has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 27%. Still, forecasts suggest that Suzhou SONAVOX ElectronicsLtd's future ROE will rise to 20% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that Suzhou SONAVOX ElectronicsLtd's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com