Singatron Electronic (China) Co., Ltd.'s (SZSE:301329) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Singatron Electronic (China) (SZSE:301329) has had a great run on the share market with its stock up by a significant 13% over the last three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on Singatron Electronic (China)'s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Singatron Electronic (China)

How To Calculate Return On Equity?

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 Singatron Electronic (China) is:

4.4% = CN¥68m ÷ CN¥1.5b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Singatron Electronic (China)'s Earnings Growth And 4.4% ROE

It is hard to argue that Singatron Electronic (China)'s ROE is much good in and of itself. Even when compared to the industry average of 6.3%, the ROE figure is pretty disappointing. Therefore, Singatron Electronic (China)'s flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that Singatron Electronic (China)'s reported growth was lower than the industry growth of 3.9% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Singatron Electronic (China)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Singatron Electronic (China) Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 70% (meaning, the company retains only 30% of profits) for Singatron Electronic (China) suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Singatron Electronic (China) started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Summary

Overall, we would be extremely cautious before making any decision on Singatron Electronic (China). The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Singatron Electronic (China) and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.