Shahe Industrial Co., Ltd.'s (SZSE:000014) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 18% over the past three months, it is easy to disregard Shahe Industrial (SZSE:000014). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Shahe Industrial's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Shahe Industrial

How To 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 Shahe Industrial is:

4.3% = CN¥74m ÷ CN¥1.7b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

A Side By Side comparison of Shahe Industrial's Earnings Growth And 4.3% ROE

It is quite clear that Shahe Industrial's ROE is rather low. However, when compared to the industry average of 3.2%, we do feel there's definitely more to the company. Even more so, after seeing Shahe Industrial's exceptional 46% net income growth over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. Such as high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Shahe Industrial compares quite favourably to the industry average, which shows a decline of 11% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Shahe Industrial fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shahe Industrial Using Its Retained Earnings Effectively?

Shahe Industrial has a really low three-year median payout ratio of 10%, meaning that it has the remaining 90% left over to reinvest into its business. So it looks like Shahe Industrial is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Shahe Industrial has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Shahe Industrial's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 2 risks we have identified for Shahe Industrial.

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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.