Suzhou Shihua New Material Technology Co., Ltd.'s (SHSE:688093) Stock Is Going Strong: Is the Market Following Fundamentals?

Suzhou Shihua New Material Technology (SHSE:688093) has had a great run on the share market with its stock up by a significant 31% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Suzhou Shihua New Material Technology's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Suzhou Shihua New Material Technology

How Is ROE Calculated?

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 Suzhou Shihua New Material Technology is:

12% = CN¥235m ÷ CN¥2.0b (Based on the trailing twelve months to September 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¥0.12 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Suzhou Shihua New Material Technology's Earnings Growth And 12% ROE

To start with, Suzhou Shihua New Material Technology's ROE looks acceptable. Especially when compared to the industry average of 6.2% the company's ROE looks pretty impressive. Probably as a result of this, Suzhou Shihua New Material Technology was able to see a decent growth of 17% over the last five years.

As a next step, we compared Suzhou Shihua New Material Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.9%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is 688093 worth today? The intrinsic value infographic in our free research report helps visualize whether 688093 is currently mispriced by the market.

Is Suzhou Shihua New Material Technology Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 43% (implying that the company retains 57% of its profits), it seems that Suzhou Shihua New Material Technology is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Suzhou Shihua New Material Technology has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Suzhou Shihua New Material Technology's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.