Shenzhen Sunnypol OptoelectronicsLtd (SZSE:002876) has had a great run on the share market with its stock up by a significant 21% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Shenzhen Sunnypol OptoelectronicsLtd's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Shenzhen Sunnypol OptoelectronicsLtd
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Shenzhen Sunnypol OptoelectronicsLtd is:
3.2% = CN¥74m ÷ CN¥2.3b (Based on the trailing twelve months to June 2024).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.03 in profit.
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.
It is quite clear that Shenzhen Sunnypol OptoelectronicsLtd's ROE is rather low. Not just that, even compared to the industry average of 6.4%, the company's ROE is entirely unremarkable. However, the moderate 6.9% net income growth seen by Shenzhen Sunnypol OptoelectronicsLtd over the past five years is definitely a positive. We reckon that there could be other factors at play here. 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.
As a next step, we compared Shenzhen Sunnypol OptoelectronicsLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.7%.
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. If you're wondering about Shenzhen Sunnypol OptoelectronicsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Shenzhen Sunnypol OptoelectronicsLtd has a low three-year median payout ratio of 16%, meaning that the company retains the remaining 84% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Besides, Shenzhen Sunnypol OptoelectronicsLtd has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.
In total, it does look like Shenzhen Sunnypol OptoelectronicsLtd has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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.