Fujian Yuanxiang New Materials Co.,Ltd (SZSE:301300) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Fujian Yuanxiang New MaterialsLtd (SZSE:301300) has had a great run on the share market with its stock up by a significant 28% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Fujian Yuanxiang New MaterialsLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Fujian Yuanxiang New MaterialsLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Fujian Yuanxiang New MaterialsLtd is:

4.9% = CN¥39m ÷ CN¥800m (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

What Is The Relationship Between ROE And 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 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.

A Side By Side comparison of Fujian Yuanxiang New MaterialsLtd's Earnings Growth And 4.9% ROE

On the face of it, Fujian Yuanxiang New MaterialsLtd's ROE is not much to talk about. Next, when compared to the average industry ROE of 6.3%, the company's ROE leaves us feeling even less enthusiastic. For this reason, Fujian Yuanxiang New MaterialsLtd's five year net income decline of 7.4% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.

So, as a next step, we compared Fujian Yuanxiang New MaterialsLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 4.9% over the last few years.

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. If you're wondering about Fujian Yuanxiang New MaterialsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Fujian Yuanxiang New MaterialsLtd Efficiently Re-investing Its Profits?

Looking at its three-year median payout ratio of 48% (or a retention ratio of 52%) which is pretty normal, Fujian Yuanxiang New MaterialsLtd's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Fujian Yuanxiang New MaterialsLtd only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking.

Conclusion

In total, we're a bit ambivalent about Fujian Yuanxiang New MaterialsLtd's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 3 risks we have identified for Fujian Yuanxiang New MaterialsLtd by visiting our risks dashboard for free on our platform here.

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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.