Poly Plastic Masterbatch (SuZhou) Co.,Ltd's (SZSE:300905) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

Poly Plastic Masterbatch (SuZhou)Ltd's (SZSE:300905) stock is up by a considerable 163% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Poly Plastic Masterbatch (SuZhou)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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Poly Plastic Masterbatch (SuZhou)Ltd

How To 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 Poly Plastic Masterbatch (SuZhou)Ltd is:

6.0% = CN¥111m ÷ CN¥1.9b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.06 in profit.

What Has ROE Got To Do With 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Poly Plastic Masterbatch (SuZhou)Ltd's Earnings Growth And 6.0% ROE

When you first look at it, Poly Plastic Masterbatch (SuZhou)Ltd's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 6.3%, we may spare it some thought. Having said that, Poly Plastic Masterbatch (SuZhou)Ltd's five year net income decline rate was 10.0%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

However, when we compared Poly Plastic Masterbatch (SuZhou)Ltd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 7.8% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Poly Plastic Masterbatch (SuZhou)Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Poly Plastic Masterbatch (SuZhou)Ltd Using Its Retained Earnings Effectively?

Poly Plastic Masterbatch (SuZhou)Ltd has a high three-year median payout ratio of 61% (that is, it is retaining 39% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. 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. You can see the 4 risks we have identified for Poly Plastic Masterbatch (SuZhou)Ltd by visiting our risks dashboard for free on our platform here.

Additionally, Poly Plastic Masterbatch (SuZhou)Ltd has paid dividends over a period of three years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Summary

In total, we would have a hard think before deciding on any investment action concerning Poly Plastic Masterbatch (SuZhou)Ltd. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Poly Plastic Masterbatch (SuZhou)Ltd's past profit growth, check out this visualization 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.