Cangzhou Mingzhu Plastic Co.,Ltd.'s (SZSE:002108) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Cangzhou Mingzhu PlasticLtd (SZSE:002108) has had a great run on the share market with its stock up by a significant 18% over the last three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Cangzhou Mingzhu PlasticLtd's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Cangzhou Mingzhu PlasticLtd

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Cangzhou Mingzhu PlasticLtd is:

3.3% = CN¥168m ÷ CN¥5.1b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Cangzhou Mingzhu PlasticLtd's Earnings Growth And 3.3% ROE

As you can see, Cangzhou Mingzhu PlasticLtd's ROE looks pretty weak. Even compared to the average industry ROE of 6.3%, the company's ROE is quite dismal. Therefore, Cangzhou Mingzhu PlasticLtd's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Cangzhou Mingzhu PlasticLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 12% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Cangzhou Mingzhu PlasticLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Cangzhou Mingzhu PlasticLtd Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 54% (implying that the company keeps only 46% of its income) of its business to reinvest into its business), most of Cangzhou Mingzhu PlasticLtd's profits are being paid to shareholders, which explains the absence of growth in earnings.

Moreover, Cangzhou Mingzhu PlasticLtd 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.

Summary

In total, we would have a hard think before deciding on any investment action concerning Cangzhou Mingzhu PlasticLtd. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. You can do your own research on Cangzhou Mingzhu PlasticLtd and see how it has performed in the past by looking at this FREE detailed graph 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.