San Yang Ma (Chongqing) Logistics Co.,Ltd.'s (SZSE:001317) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

San Yang Ma (Chongqing) LogisticsLtd (SZSE:001317) has had a great run on the share market with its stock up by a significant 30% over the last three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study San Yang Ma (Chongqing) LogisticsLtd'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.

View our latest analysis for San Yang Ma (Chongqing) LogisticsLtd

How Do You 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 San Yang Ma (Chongqing) LogisticsLtd is:

1.6% = CN¥14m ÷ CN¥858m (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.02 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 San Yang Ma (Chongqing) LogisticsLtd's Earnings Growth And 1.6% ROE

As you can see, San Yang Ma (Chongqing) LogisticsLtd's ROE looks pretty weak. Even compared to the average industry ROE of 8.3%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 32% seen by San Yang Ma (Chongqing) LogisticsLtd was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

So, as a next step, we compared San Yang Ma (Chongqing) LogisticsLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 7.8% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 San Yang Ma (Chongqing) LogisticsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is San Yang Ma (Chongqing) LogisticsLtd Making Efficient Use Of Its Profits?

San Yang Ma (Chongqing) LogisticsLtd's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 55% (or a retention ratio of 45%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 2 risks we have identified for San Yang Ma (Chongqing) LogisticsLtd by visiting our risks dashboard for free on our platform here.

Additionally, San Yang Ma (Chongqing) LogisticsLtd has paid dividends over a period of three years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Summary

In total, we would have a hard think before deciding on any investment action concerning San Yang Ma (Chongqing) LogisticsLtd. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. 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 San Yang Ma (Chongqing) LogisticsLtd'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.