Are ShanDongDenghai Seeds Co.,Ltd's (SZSE:002041) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

It is hard to get excited after looking at ShanDongDenghai SeedsLtd's (SZSE:002041) recent performance, when its stock has declined 7.7% over the past week. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study ShanDongDenghai SeedsLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for ShanDongDenghai SeedsLtd

How Do You Calculate Return On Equity?

ROE 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 ShanDongDenghai SeedsLtd is:

6.5% = CN¥256m ÷ CN¥3.9b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.07 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 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.

ShanDongDenghai SeedsLtd's Earnings Growth And 6.5% ROE

When you first look at it, ShanDongDenghai SeedsLtd's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 7.6%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that ShanDongDenghai SeedsLtd's net income grew significantly at a rate of 25% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. 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 ShanDongDenghai SeedsLtd's growth is quite high when compared to the industry average growth of 2.5% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is ShanDongDenghai SeedsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is ShanDongDenghai SeedsLtd Efficiently Re-investing Its Profits?

ShanDongDenghai SeedsLtd has a really low three-year median payout ratio of 14%, meaning that it has the remaining 86% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Additionally, ShanDongDenghai SeedsLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 13% of its profits over the next three years. Regardless, the future ROE for ShanDongDenghai SeedsLtd is predicted to rise to 9.1% despite there being not much change expected in its payout ratio.

Summary

On the whole, we do feel that ShanDongDenghai SeedsLtd has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.