Tangshan Sanyou Chemical Industries Co.,Ltd (SHSE:600409) Is Up But Financials Look Inconsistent: Which Way Is The Stock Headed?

Tangshan Sanyou Chemical IndustriesLtd's (SHSE:600409) stock up by 4.9% over the past week. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Specifically, we decided to study Tangshan Sanyou Chemical IndustriesLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Tangshan Sanyou Chemical IndustriesLtd

How To 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 Tangshan Sanyou Chemical IndustriesLtd is:

5.6% = CN¥853m ÷ CN¥15b (Based on the trailing twelve months to September 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¥0.06 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. 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.

A Side By Side comparison of Tangshan Sanyou Chemical IndustriesLtd's Earnings Growth And 5.6% ROE

On the face of it, Tangshan Sanyou Chemical IndustriesLtd's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.2%, we may spare it some thought. Still, Tangshan Sanyou Chemical IndustriesLtd has seen a flat net income growth over the past five years. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

We then compared Tangshan Sanyou Chemical IndustriesLtd's net income growth with the industry and found that the average industry growth rate was 4.9% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Tangshan Sanyou Chemical IndustriesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tangshan Sanyou Chemical IndustriesLtd Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 30% (implying that the company keeps 70% of its income) over the last three years, Tangshan Sanyou Chemical IndustriesLtd has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Tangshan Sanyou Chemical IndustriesLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we feel that the performance shown by Tangshan Sanyou Chemical IndustriesLtd can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.