Sichuan Lutianhua Company Limited By Shares' (SZSE:000912) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Sichuan Lutianhua Company Limited By Shares (SZSE:000912) has had a great run on the share market with its stock up by a significant 27% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Sichuan Lutianhua Company Limited By Shares' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Sichuan Lutianhua Company Limited By Shares

How To 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 Sichuan Lutianhua Company Limited By Shares is:

0.6% = CN¥39m ÷ CN¥6.5b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.01 in profit.

Why Is ROE Important For 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. 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.

A Side By Side comparison of Sichuan Lutianhua Company Limited By Shares' Earnings Growth And 0.6% ROE

It is hard to argue that Sichuan Lutianhua Company Limited By Shares' ROE is much good in and of itself. Even when compared to the industry average of 6.2%, the ROE figure is pretty disappointing. For this reason, Sichuan Lutianhua Company Limited By Shares' five year net income decline of 13% 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.

So, as a next step, we compared Sichuan Lutianhua Company Limited By Shares' performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 4.9% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Sichuan Lutianhua Company Limited By Shares fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sichuan Lutianhua Company Limited By Shares Efficiently Re-investing Its Profits?

Because Sichuan Lutianhua Company Limited By Shares doesn't pay any regular dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Summary

Overall, we have mixed feelings about Sichuan Lutianhua Company Limited By Shares. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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 2 risks we have identified for Sichuan Lutianhua Company Limited By Shares 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.