Has Shanghai Hajime Advanced Material Technology Co., Ltd.'s (SZSE:301000) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Shanghai Hajime Advanced Material Technology's (SZSE:301000) stock is up by a considerable 129% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Shanghai Hajime Advanced Material Technology's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Shanghai Hajime Advanced Material Technology

How Do You 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 Shanghai Hajime Advanced Material Technology is:

12% = CN¥139m ÷ CN¥1.1b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 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. 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 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.

Shanghai Hajime Advanced Material Technology's Earnings Growth And 12% ROE

At first glance, Shanghai Hajime Advanced Material Technology seems to have a decent ROE. Especially when compared to the industry average of 6.3% the company's ROE looks pretty impressive. However, for some reason, the higher returns aren't reflected in Shanghai Hajime Advanced Material Technology's meagre five year net income growth average of 4.2%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Shanghai Hajime Advanced Material Technology's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 4.9% in the same period.

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 Shanghai Hajime Advanced Material Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Shanghai Hajime Advanced Material Technology Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 76% (that is, the company retains only 24% of its income) over the past three years for Shanghai Hajime Advanced Material Technology suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Shanghai Hajime Advanced Material Technology has paid dividends over a period of four years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

Overall, we feel that Shanghai Hajime Advanced Material Technology certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.