Suzhou Longway Eletronic Machinery Co., Ltd (SZSE:301202) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Suzhou Longway Eletronic Machinery (SZSE:301202) has had a great run on the share market with its stock up by a significant 42% 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 Suzhou Longway Eletronic Machinery'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Suzhou Longway Eletronic Machinery

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 Longway Eletronic Machinery is:

6.3% = CN¥74m ÷ CN¥1.2b (Based on the trailing twelve months to September 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¥0.06 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. 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.

Suzhou Longway Eletronic Machinery's Earnings Growth And 6.3% ROE

At first glance, Suzhou Longway Eletronic Machinery's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.9%. Even so, Suzhou Longway Eletronic Machinery has shown a fairly decent growth in its net income which grew at a rate of 5.1%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving 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 Longway Eletronic Machinery's reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.

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. 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 Longway Eletronic Machinery is trading on a high P/E or a low P/E, relative to its industry.

Is Suzhou Longway Eletronic Machinery Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 76% (or a retention ratio of 24%) for Suzhou Longway Eletronic Machinery suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

While Suzhou Longway Eletronic Machinery has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

In total, we're a bit ambivalent about Suzhou Longway Eletronic Machinery's performance. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Suzhou Longway Eletronic Machinery's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.