Declining Stock and Solid Fundamentals: Is The Market Wrong About Proya Cosmetics Co.,Ltd. (SHSE:603605)?

Proya CosmeticsLtd (SHSE:603605) has had a rough three months with its share price down 22%. 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. Particularly, we will be paying attention to Proya CosmeticsLtd's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Proya CosmeticsLtd

How Do You Calculate Return On Equity?

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 Proya CosmeticsLtd is:

29% = CN¥1.3b ÷ CN¥4.6b (Based on the trailing twelve months to March 2024).

The 'return' is the profit 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¥0.29 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. 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. 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.

Proya CosmeticsLtd's Earnings Growth And 29% ROE

Firstly, we acknowledge that Proya CosmeticsLtd has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 9.9% which is quite remarkable. Under the circumstances, Proya CosmeticsLtd's considerable five year net income growth of 28% was to be expected.

Next, on comparing with the industry net income growth, we found that Proya CosmeticsLtd's growth is quite high when compared to the industry average growth of 9.8% in the same period, which is great to see.

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. What is 603605 worth today? The intrinsic value infographic in our free research report helps visualize whether 603605 is currently mispriced by the market.

Is Proya CosmeticsLtd Efficiently Re-investing Its Profits?

The three-year median payout ratio for Proya CosmeticsLtd is 28%, which is moderately low. The company is retaining the remaining 72%. By the looks of it, the dividend is well covered and Proya CosmeticsLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Proya CosmeticsLtd has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 34% of its profits over the next three years. Accordingly, forecasts suggest that Proya CosmeticsLtd's future ROE will be 29% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that Proya CosmeticsLtd'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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.