Shandong Weifang Rainbow Chemical Co., Ltd's (SZSE:301035) Stock Has Shown A Decent Performance: Have Financials A Role To Play?

Shandong Weifang Rainbow Chemical's (SZSE:301035) stock up by 4.7% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, 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. Specifically, we decided to study Shandong Weifang Rainbow Chemical's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Shandong Weifang Rainbow Chemical

How Is ROE Calculated?

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 Shandong Weifang Rainbow Chemical is:

6.9% = CN¥474m ÷ CN¥6.9b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.07 in profit.

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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Shandong Weifang Rainbow Chemical's Earnings Growth And 6.9% ROE

On the face of it, Shandong Weifang Rainbow Chemical's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 6.2%, we may spare it some thought. Even so, Shandong Weifang Rainbow Chemical has shown a fairly decent growth in its net income which grew at a rate of 8.8%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Shandong Weifang Rainbow Chemical's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 4.9% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Shandong Weifang Rainbow Chemical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shandong Weifang Rainbow Chemical Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 37% (implying that the company retains 63% of its profits), it seems that Shandong Weifang Rainbow Chemical is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

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.

Conclusion

Overall, we feel that Shandong Weifang Rainbow Chemical certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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.