Suzhou Sushi Testing Group Co.,Ltd. (SZSE:300416) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

It is hard to get excited after looking at Suzhou Sushi Testing GroupLtd's (SZSE:300416) recent performance, when its stock has declined 8.5% over the past week. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Suzhou Sushi Testing GroupLtd's ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Suzhou Sushi Testing GroupLtd

How Is ROE Calculated?

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 Suzhou Sushi Testing GroupLtd is:

12% = CN¥362m ÷ CN¥3.0b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.12 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. 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.

Suzhou Sushi Testing GroupLtd's Earnings Growth And 12% ROE

To begin with, Suzhou Sushi Testing GroupLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.3%. This certainly adds some context to Suzhou Sushi Testing GroupLtd's exceptional 31% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Suzhou Sushi Testing GroupLtd's growth is quite high when compared to the industry average growth of 6.4% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Suzhou Sushi Testing GroupLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Suzhou Sushi Testing GroupLtd Making Efficient Use Of Its Profits?

Suzhou Sushi Testing GroupLtd's ' three-year median payout ratio is on the lower side at 20% implying that it is retaining a higher percentage (80%) of its profits. So it looks like Suzhou Sushi Testing GroupLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Suzhou Sushi Testing GroupLtd has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 21%. Regardless, the future ROE for Suzhou Sushi Testing GroupLtd is predicted to rise to 15% despite there being not much change expected in its payout ratio.

Conclusion

In total, we are pretty happy with Suzhou Sushi Testing GroupLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.