Is Weakness In Fujian Funeng Co., Ltd. (SHSE:600483) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Simply Wall St · 10/16 23:09

Fujian Funeng (SHSE:600483) has had a rough three months with its share price down 18%. 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. Particularly, we will be paying attention to Fujian Funeng's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Fujian Funeng

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 Fujian Funeng is:

12% = CN¥3.5b ÷ CN¥29b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.12 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Fujian Funeng's Earnings Growth And 12% ROE

To begin with, Fujian Funeng seems to have a respectable ROE. On comparing with the average industry ROE of 8.0% the company's ROE looks pretty remarkable. This certainly adds some context to Fujian Funeng's decent 19% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Fujian Funeng's growth is quite high when compared to the industry average growth of 8.8% in the same period, which is great to see.

past-earnings-growth
SHSE:600483 Past Earnings Growth October 16th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 600483 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Fujian Funeng Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 29% (implying that the company retains 71% of its profits), it seems that Fujian Funeng is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Fujian Funeng is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

In total, we are pretty happy with Fujian Funeng's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.