Shandong Weifang Rainbow Chemical Co., Ltd's (SZSE:301035) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Simply Wall St · 08/30 22:49

With its stock down 25% over the past three months, it is easy to disregard Shandong Weifang Rainbow Chemical (SZSE:301035). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Shandong Weifang Rainbow Chemical's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Shandong Weifang Rainbow Chemical

How Is ROE Calculated?

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 Shandong Weifang Rainbow Chemical is:

12% = CN¥822m ÷ CN¥7.1b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.12 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Shandong Weifang Rainbow Chemical's Earnings Growth And 12% ROE

To start with, Shandong Weifang Rainbow Chemical's ROE looks acceptable. Especially when compared to the industry average of 6.5% the company's ROE looks pretty impressive. This probably laid the ground for Shandong Weifang Rainbow Chemical's significant 20% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Shandong Weifang Rainbow Chemical's 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 6.8% in the same 5-year period.

past-earnings-growth
SZSE:301035 Past Earnings Growth August 30th 2024

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. Doing so will help them establish if the stock's future looks promising or ominous. What is 301035 worth today? The intrinsic value infographic in our free research report helps visualize whether 301035 is currently mispriced by the market.

Is Shandong Weifang Rainbow Chemical Efficiently Re-investing Its Profits?

Shandong Weifang Rainbow Chemical has a three-year median payout ratio of 34% (where it is retaining 66% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Shandong Weifang Rainbow Chemical is reinvesting its earnings efficiently.

Besides, Shandong Weifang Rainbow Chemical has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with Shandong Weifang Rainbow Chemical'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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.