Lafang China Co.,Ltd's (SHSE:603630) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Lafang ChinaLtd (SHSE:603630) has had a great run on the share market with its stock up by a significant 12% over the last week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Lafang ChinaLtd's ROE in this article.

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.

See our latest analysis for Lafang ChinaLtd

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 Lafang ChinaLtd is:

2.1% = CN¥40m ÷ CN¥1.9b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.02.

Why Is ROE Important For 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.

Lafang ChinaLtd's Earnings Growth And 2.1% ROE

It is hard to argue that Lafang ChinaLtd's ROE is much good in and of itself. Even when compared to the industry average of 5.8%, the ROE figure is pretty disappointing. As a result, Lafang ChinaLtd's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 0.6% in the same 5-year period, we still found Lafang ChinaLtd's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

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. Is Lafang ChinaLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Lafang ChinaLtd Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 43% (or a retention ratio of 57%), Lafang ChinaLtd hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Lafang ChinaLtd has paid dividends over a period of seven years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we're a bit ambivalent about Lafang ChinaLtd's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Lafang ChinaLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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

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.