Can Sunshine Global Circuits Co.,Ltd.'s (SZSE:300739) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Simply Wall St · 09/27 22:00

Sunshine Global CircuitsLtd (SZSE:300739) has had a great run on the share market with its stock up by a significant 15% over the last week. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Sunshine Global CircuitsLtd'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Sunshine Global CircuitsLtd

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 Sunshine Global CircuitsLtd is:

3.7% = CN¥73m ÷ CN¥2.0b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Sunshine Global CircuitsLtd's Earnings Growth And 3.7% ROE

It is quite clear that Sunshine Global CircuitsLtd's ROE is rather low. Even when compared to the industry average of 6.4%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 3.3% seen by Sunshine Global CircuitsLtd was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Sunshine Global CircuitsLtd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 4.8% in the same period. This is quite worrisome.

past-earnings-growth
SZSE:300739 Past Earnings Growth September 27th 2024

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Sunshine Global CircuitsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Sunshine Global CircuitsLtd Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 69% (implying that 31% of the profits are retained), most of Sunshine Global CircuitsLtd's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 5 risks we have identified for Sunshine Global CircuitsLtd by visiting our risks dashboard for free on our platform here.

Moreover, Sunshine Global CircuitsLtd has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Conclusion

On the whole, Sunshine Global CircuitsLtd's performance is quite a big let-down. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Sunshine Global CircuitsLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.