Sunwoda Electronic Co.,Ltd's (SZSE:300207) Stock Is Going Strong: Have Financials A Role To Play?

Simply Wall St · 10/16 02:34

Sunwoda ElectronicLtd (SZSE:300207) has had a great run on the share market with its stock up by a significant 39% 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. Particularly, we will be paying attention to Sunwoda ElectronicLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Sunwoda ElectronicLtd

How Do You Calculate Return On Equity?

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 Sunwoda ElectronicLtd is:

1.8% = CN¥575m ÷ CN¥33b (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¥0.02 in profit.

What Has ROE Got To Do With 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 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.

Sunwoda ElectronicLtd's Earnings Growth And 1.8% ROE

It is quite clear that Sunwoda ElectronicLtd's ROE is rather low. Even when compared to the industry average of 6.9%, the ROE figure is pretty disappointing. Although, we can see that Sunwoda ElectronicLtd saw a modest net income growth of 14% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Sunwoda ElectronicLtd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 12% in the same period.

past-earnings-growth
SZSE:300207 Past Earnings Growth October 16th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Sunwoda ElectronicLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Sunwoda ElectronicLtd Making Efficient Use Of Its Profits?

In Sunwoda ElectronicLtd's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 13% (or a retention ratio of 87%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Sunwoda ElectronicLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 17% over the next three years. However, Sunwoda ElectronicLtd's future ROE is expected to rise to 8.1% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Summary

Overall, we feel that Sunwoda ElectronicLtd certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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.