Is Shenzhen Sunlord Electronics Co.,Ltd.'s (SZSE:002138) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Shenzhen Sunlord ElectronicsLtd's (SZSE:002138) stock increased significantly by 7.8% over the past week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Shenzhen Sunlord ElectronicsLtd'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Shenzhen Sunlord ElectronicsLtd

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 Shenzhen Sunlord ElectronicsLtd is:

13% = CN¥836m ÷ CN¥6.5b (Based on the trailing twelve months to March 2024).

The 'return' is the profit 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¥0.13 in profit.

What Has ROE Got To Do With 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. 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 Shenzhen Sunlord ElectronicsLtd's Earnings Growth And 13% ROE

To start with, Shenzhen Sunlord ElectronicsLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 6.3%. Yet, Shenzhen Sunlord ElectronicsLtd has posted measly growth of 5.0% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

As a next step, we compared Shenzhen Sunlord ElectronicsLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 6.4% in the same 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shenzhen Sunlord ElectronicsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shenzhen Sunlord ElectronicsLtd Using Its Retained Earnings Effectively?

While Shenzhen Sunlord ElectronicsLtd has a decent three-year median payout ratio of 32% (or a retention ratio of 68%), it has seen very little growth in earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Shenzhen Sunlord ElectronicsLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 29%. However, Shenzhen Sunlord ElectronicsLtd's ROE is predicted to rise to 16% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we do feel that Shenzhen Sunlord ElectronicsLtd has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.