Could The Market Be Wrong About Shanghai Putailai New Energy Technology Co.,Ltd. (SHSE:603659) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Shanghai Putailai New Energy TechnologyLtd's (SHSE:603659) recent performance, when its stock has declined 13% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Shanghai Putailai New Energy TechnologyLtd's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Putailai New Energy TechnologyLtd

How Is ROE Calculated?

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 Putailai New Energy TechnologyLtd is:

8.9% = CN¥1.8b ÷ CN¥20b (Based on the trailing twelve months to September 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¥0.09 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of Shanghai Putailai New Energy TechnologyLtd's Earnings Growth And 8.9% ROE

When you first look at it, Shanghai Putailai New Energy TechnologyLtd's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 6.2% doesn't go unnoticed by us. Particularly, the substantial 23% net income growth seen by Shanghai Putailai New Energy TechnologyLtd over the past five years is impressive . Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing with the industry net income growth, we found that Shanghai Putailai New Energy TechnologyLtd's growth is quite high when compared to the industry average growth of 4.7% 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. Doing so will help them establish if the stock's future looks promising or ominous. Is Shanghai Putailai New Energy TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai Putailai New Energy TechnologyLtd Making Efficient Use Of Its Profits?

Shanghai Putailai New Energy TechnologyLtd's three-year median payout ratio to shareholders is 16%, which is quite low. This implies that the company is retaining 84% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Shanghai Putailai New Energy TechnologyLtd has been paying dividends over a period of seven 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 17% of its profits over the next three years. Still, forecasts suggest that Shanghai Putailai New Energy TechnologyLtd's future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that Shanghai Putailai New Energy TechnologyLtd's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.