Shenzhen RongDa Photosensitive Science & Technology Co., Ltd. (SZSE:300576) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 11% over the past month, it is easy to disregard Shenzhen RongDa Photosensitive Science & Technology (SZSE:300576). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Shenzhen RongDa Photosensitive Science & Technology's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Shenzhen RongDa Photosensitive Science & Technology

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Shenzhen RongDa Photosensitive Science & Technology is:

8.4% = CN¥113m ÷ CN¥1.3b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 RongDa Photosensitive Science & Technology's Earnings Growth And 8.4% ROE

When you first look at it, Shenzhen RongDa Photosensitive Science & Technology's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 6.2% which we definitely can't overlook. Especially when you consider Shenzhen RongDa Photosensitive Science & Technology's exceptional 21% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Shenzhen RongDa Photosensitive Science & Technology's growth is quite high when compared to the industry average growth of 4.9% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. 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 Shenzhen RongDa Photosensitive Science & Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Shenzhen RongDa Photosensitive Science & Technology Using Its Retained Earnings Effectively?

Shenzhen RongDa Photosensitive Science & Technology's ' three-year median payout ratio is on the lower side at 20% implying that it is retaining a higher percentage (80%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Shenzhen RongDa Photosensitive Science & Technology has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Shenzhen RongDa Photosensitive Science & Technology's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 1 risk we have identified for Shenzhen RongDa Photosensitive Science & Technology 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.