Should Weakness in LONGi Green Energy Technology Co., Ltd.'s (SHSE:601012) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

It is hard to get excited after looking at LONGi Green Energy Technology's (SHSE:601012) recent performance, when its stock has declined 24% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to LONGi Green Energy Technology's ROE today.

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.

View our latest analysis for LONGi Green Energy Technology

How Is ROE Calculated?

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 LONGi Green Energy Technology is:

6.9% = CN¥4.7b ÷ CN¥68b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned 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¥0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

LONGi Green Energy Technology's Earnings Growth And 6.9% ROE

On the face of it, LONGi Green Energy Technology's ROE is not much to talk about. However, its ROE is similar to the industry average of 5.8%, so we won't completely dismiss the company. Looking at LONGi Green Energy Technology's exceptional 21% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing LONGi Green Energy Technology's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 19% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is LONGi Green Energy Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is LONGi Green Energy Technology Making Efficient Use Of Its Profits?

LONGi Green Energy Technology has a really low three-year median payout ratio of 15%, meaning that it has the remaining 85% left over to reinvest into its business. So it looks like LONGi Green Energy Technology is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, LONGi Green Energy Technology has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 16% of its profits over the next three years. However, LONGi Green Energy Technology's ROE is predicted to rise to 13% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we do feel that LONGi Green Energy Technology has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.