Is Shanghai Sunglow Packaging Technology Co.,Ltd's (SHSE:603499) Recent Price Movement Underpinned By Its Weak Fundamentals?

With its stock down 13% over the past month, it is easy to disregard Shanghai Sunglow Packaging TechnologyLtd (SHSE:603499). It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Shanghai Sunglow Packaging TechnologyLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Shanghai Sunglow Packaging TechnologyLtd

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 Shanghai Sunglow Packaging TechnologyLtd is:

3.1% = CN¥22m ÷ CN¥717m (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Shanghai Sunglow Packaging TechnologyLtd's Earnings Growth And 3.1% ROE

As you can see, Shanghai Sunglow Packaging TechnologyLtd's ROE looks pretty weak. Not just that, even compared to the industry average of 5.6%, the company's ROE is entirely unremarkable. For this reason, Shanghai Sunglow Packaging TechnologyLtd's five year net income decline of 27% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

As a next step, we compared Shanghai Sunglow Packaging TechnologyLtd's performance with the industry and found thatShanghai Sunglow Packaging TechnologyLtd's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 0.2% in the same period, which is a slower than the company.

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 Shanghai Sunglow Packaging TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai Sunglow Packaging TechnologyLtd Making Efficient Use Of Its Profits?

Looking at its three-year median payout ratio of 43% (or a retention ratio of 57%) which is pretty normal, Shanghai Sunglow Packaging TechnologyLtd's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Shanghai Sunglow Packaging TechnologyLtd has paid dividends over a period of six years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Summary

In total, we're a bit ambivalent about Shanghai Sunglow Packaging TechnologyLtd'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. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 5 risks we have identified for Shanghai Sunglow Packaging TechnologyLtd by visiting our risks dashboard for free on our platform here.

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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.