Is China Sunsine Chemical Holdings Ltd.'s (SGX:CH8) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

China Sunsine Chemical Holdings (SGX:CH8) has had a great run on the share market with its stock up by a significant 38% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on China Sunsine Chemical Holdings' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 China Sunsine Chemical Holdings

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for China Sunsine Chemical Holdings is:

7.9% = CN¥205m ÷ CN¥2.6b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.08 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of China Sunsine Chemical Holdings' Earnings Growth And 7.9% ROE

On the face of it, China Sunsine Chemical Holdings' ROE is not much to talk about. However, its ROE is similar to the industry average of 9.6%, so we won't completely dismiss the company. On the other hand, China Sunsine Chemical Holdings reported a moderate 18% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared China Sunsine Chemical Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.6% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about China Sunsine Chemical Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is China Sunsine Chemical Holdings Making Efficient Use Of Its Profits?

China Sunsine Chemical Holdings' three-year median payout ratio to shareholders is 16% (implying that it retains 84% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, China Sunsine Chemical Holdings has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 16%. However, China Sunsine Chemical Holdings' ROE is predicted to rise to 11% despite there being no anticipated change in its payout ratio.

Summary

Overall, we feel that China Sunsine Chemical Holdings certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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.
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