Suzhou Secote Precision Electronic Co.,LTD's (SHSE:603283) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Simply Wall St · 09/01 00:07

It is hard to get excited after looking at Suzhou Secote Precision ElectronicLTD's (SHSE:603283) recent performance, when its stock has declined 9.6% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Suzhou Secote Precision ElectronicLTD's ROE in this article.

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.

See our latest analysis for Suzhou Secote Precision ElectronicLTD

How Is ROE Calculated?

ROE 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 Suzhou Secote Precision ElectronicLTD is:

31% = CN¥749m ÷ CN¥2.4b (Based on the trailing twelve months to June 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¥0.31 in profit.

Why Is ROE Important For 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. 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 Suzhou Secote Precision ElectronicLTD's Earnings Growth And 31% ROE

First thing first, we like that Suzhou Secote Precision ElectronicLTD has an impressive ROE. Secondly, even when compared to the industry average of 7.0% the company's ROE is quite impressive. Under the circumstances, Suzhou Secote Precision ElectronicLTD's considerable five year net income growth of 39% was to be expected.

We then compared Suzhou Secote Precision ElectronicLTD'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 9.1% in the same 5-year period.

past-earnings-growth
SHSE:603283 Past Earnings Growth September 1st 2024

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Suzhou Secote Precision ElectronicLTD's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Suzhou Secote Precision ElectronicLTD Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a regular dividend. This is likely what's driving the high earnings growth number discussed above.

Conclusion

On the whole, we feel that Suzhou Secote Precision ElectronicLTD's performance has been quite good. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.