Poly Plastic Masterbatch (SuZhou) Co.,Ltd's (SZSE:300905) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Poly Plastic Masterbatch (SuZhou)Ltd's (SZSE:300905) stock is up by a considerable 33% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to Poly Plastic Masterbatch (SuZhou)Ltd's ROE today.

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 Poly Plastic Masterbatch (SuZhou)Ltd

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 Poly Plastic Masterbatch (SuZhou)Ltd is:

5.6% = CN¥104m ÷ CN¥1.9b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.06 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. 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. 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.

A Side By Side comparison of Poly Plastic Masterbatch (SuZhou)Ltd's Earnings Growth And 5.6% ROE

At first glance, Poly Plastic Masterbatch (SuZhou)Ltd's ROE doesn't look very promising. However, its ROE is similar to the industry average of 6.2%, so we won't completely dismiss the company. But then again, Poly Plastic Masterbatch (SuZhou)Ltd's five year net income shrunk at a rate of 4.1%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

That being said, we compared Poly Plastic Masterbatch (SuZhou)Ltd's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 4.9% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Poly Plastic Masterbatch (SuZhou)Ltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Poly Plastic Masterbatch (SuZhou)Ltd Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 70% (implying that 30% of the profits are retained), most of Poly Plastic Masterbatch (SuZhou)Ltd's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. Our risks dashboard should have the 3 risks we have identified for Poly Plastic Masterbatch (SuZhou)Ltd.

Moreover, Poly Plastic Masterbatch (SuZhou)Ltd has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

On the whole, Poly Plastic Masterbatch (SuZhou)Ltd's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Poly Plastic Masterbatch (SuZhou)Ltd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.