Is Sanxiang Advanced Materials Co., Ltd.'s (SHSE:603663) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Sanxiang Advanced Materials' (SHSE:603663) stock increased significantly by 57% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Sanxiang Advanced Materials' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Sanxiang Advanced Materials

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Sanxiang Advanced Materials is:

4.7% = CN¥66m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax 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¥0.05 in profit.

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What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Sanxiang Advanced Materials' Earnings Growth And 4.7% ROE

At first glance, Sanxiang Advanced Materials' ROE doesn't look very promising. Next, when compared to the average industry ROE of 6.2%, the company's ROE leaves us feeling even less enthusiastic. Sanxiang Advanced Materials was still able to see a decent net income growth of 6.0% over the past five years. So, the growth in the company's earnings could probably have been caused by other variables. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Sanxiang Advanced Materials' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 4.9% in the same 5-year period.

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. If you're wondering about Sanxiang Advanced Materials''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sanxiang Advanced Materials Efficiently Re-investing Its Profits?

Sanxiang Advanced Materials has a low three-year median payout ratio of 20%, meaning that the company retains the remaining 80% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Sanxiang Advanced Materials has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we do feel that Sanxiang Advanced Materials has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Sanxiang Advanced Materials visit our risks dashboard for free.

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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.