Could The Market Be Wrong About Shandong Weifang Rainbow Chemical Co., Ltd (SZSE:301035) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Shandong Weifang Rainbow Chemical's (SZSE:301035) recent performance, when its stock has declined 20% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Shandong Weifang Rainbow Chemical'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 Shandong Weifang Rainbow Chemical

How Do You Calculate Return On Equity?

Return on equity 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 Shandong Weifang Rainbow Chemical is:

12% = CN¥822m ÷ CN¥7.1b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.12 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Shandong Weifang Rainbow Chemical's Earnings Growth And 12% ROE

To start with, Shandong Weifang Rainbow Chemical's ROE looks acceptable. Especially when compared to the industry average of 6.3% the company's ROE looks pretty impressive. Probably as a result of this, Shandong Weifang Rainbow Chemical was able to see an impressive net income growth of 20% over the last five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Shandong Weifang Rainbow Chemical's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.8%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Shandong Weifang Rainbow Chemical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shandong Weifang Rainbow Chemical Efficiently Re-investing Its Profits?

The three-year median payout ratio for Shandong Weifang Rainbow Chemical is 34%, which is moderately low. The company is retaining the remaining 66%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Shandong Weifang Rainbow Chemical is reinvesting its earnings efficiently.

Additionally, Shandong Weifang Rainbow Chemical has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Shandong Weifang Rainbow Chemical's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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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.