Is Weakness In ShenZhen YUTO Packaging Technology Co., Ltd. (SZSE:002831) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

ShenZhen YUTO Packaging Technology (SZSE:002831) has had a rough three months with its share price down 16%. 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 ShenZhen YUTO Packaging Technology's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. 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 ShenZhen YUTO Packaging Technology

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 ShenZhen YUTO Packaging Technology is:

13% = CN¥1.5b ÷ CN¥12b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.13.

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.

ShenZhen YUTO Packaging Technology's Earnings Growth And 13% ROE

At first glance, ShenZhen YUTO Packaging Technology seems to have a decent ROE. On comparing with the average industry ROE of 5.6% the company's ROE looks pretty remarkable. This probably laid the ground for ShenZhen YUTO Packaging Technology's moderate 9.2% net income growth seen over the past five years.

When you consider the fact that the industry earnings have shrunk at a rate of 0.2% in the same 5-year period, the company's net income growth is pretty remarkable.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is ShenZhen YUTO Packaging Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is ShenZhen YUTO Packaging Technology Using Its Retained Earnings Effectively?

ShenZhen YUTO Packaging Technology has a low three-year median payout ratio of 22%, meaning that the company retains the remaining 78% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, ShenZhen YUTO Packaging Technology has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 54% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with ShenZhen YUTO Packaging 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.