Songcheng Performance Development Co.,Ltd's (SZSE:300144) Dismal Stock Performance Reflects Weak Fundamentals

With its stock down 24% over the past three months, it is easy to disregard Songcheng Performance DevelopmentLtd (SZSE:300144). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Songcheng Performance DevelopmentLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Songcheng Performance DevelopmentLtd

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 Songcheng Performance DevelopmentLtd is:

1.1% = CN¥88m ÷ CN¥7.8b (Based on the trailing twelve months to March 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¥0.01 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Songcheng Performance DevelopmentLtd's Earnings Growth And 1.1% ROE

As you can see, Songcheng Performance DevelopmentLtd's ROE looks pretty weak. Even when compared to the industry average of 8.8%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 28% seen by Songcheng Performance DevelopmentLtd was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

As a next step, we compared Songcheng Performance DevelopmentLtd's performance with the industry and found thatSongcheng Performance DevelopmentLtd's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 12% in the same period, which is a slower than the company.

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. This then helps them determine if the stock is placed for a bright or bleak future. What is 300144 worth today? The intrinsic value infographic in our free research report helps visualize whether 300144 is currently mispriced by the market.

Is Songcheng Performance DevelopmentLtd Efficiently Re-investing Its Profits?

Songcheng Performance DevelopmentLtd's very high LTM (or last twelve month) payout ratio of 321% over the last three years suggests that the company is paying its shareholders more than what it is earning and this explains the company's shrinking earnings. Paying a dividend higher than reported profits is not a sustainable move. Our risks dashboard should have the 3 risks we have identified for Songcheng Performance DevelopmentLtd.

Moreover, Songcheng Performance DevelopmentLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 26% over the next three years. The fact that the company's ROE is expected to rise to 16% over the same period is explained by the drop in the payout ratio.

Summary

Overall, we would be extremely cautious before making any decision on Songcheng Performance DevelopmentLtd. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.

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