Are Sinostone(Guangdong) Co.,Ltd.'s (SZSE:001212) Mixed Financials Driving The Negative Sentiment?

With its stock down 22% over the past month, it is easy to disregard Sinostone(Guangdong)Ltd (SZSE:001212). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Sinostone(Guangdong)Ltd'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Sinostone(Guangdong)Ltd

How Do You Calculate Return On Equity?

ROE 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 Sinostone(Guangdong)Ltd is:

5.4% = CN¥87m ÷ CN¥1.6b (Based on the trailing twelve months to September 2023).

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¥0.05 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. 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.

Sinostone(Guangdong)Ltd's Earnings Growth And 5.4% ROE

On the face of it, Sinostone(Guangdong)Ltd's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.6%. But then again, Sinostone(Guangdong)Ltd's five year net income shrunk at a rate of 3.8%. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.

As a next step, we compared Sinostone(Guangdong)Ltd's performance with the industry and found thatSinostone(Guangdong)Ltd's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 1.7% 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. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Sinostone(Guangdong)Ltd is trading on a high P/E or a low P/E, relative to its industry.

Is Sinostone(Guangdong)Ltd Efficiently Re-investing Its Profits?

Sinostone(Guangdong)Ltd's low three-year median payout ratio of 14% (implying that it retains the remaining 86% of its profits) comes as a surprise when you pair it with the shrinking earnings. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Sinostone(Guangdong)Ltd has been paying dividends over a period of three years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

In total, we're a bit ambivalent about Sinostone(Guangdong)Ltd's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the 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. Our risks dashboard would have the 2 risks we have identified for Sinostone(Guangdong)Ltd.

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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.