Many of our readers will already know that Shanghai Menon Animal Nutrition Technology Co., Ltd. (SZSE:301156)’s share price has risen significantly by 15% over the past three months. As most of our readers know, fundamentals drive market price movements over the long term. Therefore, we decided to look at the company’s key financial indicators today to determine if they have had any impact on the recent price movement. In this article, we decided to focus on Shanghai Menon Animal Nutrition Technology Co., Ltd.’s ROE.
Return on Equity (ROE) is a useful tool to assess how effectively a company can generate profits on the investment it received from its shareholders. In other words, it reveals how successful a company is in converting shareholder investments into profits.
View the latest analysis for Shanghai Menon Animal Nutrition Technology
How is ROE calculated?
Return on equity can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) / Shareholders’ Equity
So, based on the above formula, the ROE for Shanghai Menon Animal Nutrition Technology is:
7.9% = CNY63m / CNY803m (Based on the trailing twelve months to March 2024).
“Return” refers to the profit the company has made over the past year – one way to conceptualize this is that for each RMB1 of shareholders’ capital, the company made RMB0.08 in profit.
Why is ROE important for earnings growth?
Thus far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much a company reinvests or “retains” these profits, and how effectively it does so, we are able to assess a company’s earnings growth potential. Assuming all other things are equal, companies with both a higher return on equity and higher retained earnings will usually have higher growth rates compared to companies that don’t have the same characteristics.
Shanghai Menon Animal Nutrition Technology’s revenue growth and 7.9% ROE
At first glance, Shanghai Menon Animal Nutrition Technology’s ROE doesn’t look very promising. However, we don’t write the company off entirely, as its ROE is on par with the industry average of 8.1%. We can see that Shanghai Menon Animal Nutrition Technology’s five-year net profit growth rate was an average of 4.0%, which is a somewhat low growth rate. Keep in mind that the company’s ROE is not that high to begin with, so this could also be one of the reasons for the company’s low revenue growth.
As a next step, we compare Shanghai Menon Animal Nutrition Technology’s net profit growth with the industry, and we’re pleased to find that the company’s growth is above the industry average of 2.9%.
Earnings growth is a big driver of stock valuation. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already priced into the stock price. Doing so will tell them whether the stock is heading into clear blue waters or swamps await. What is 301156 currently worth? The intrinsic value infographic in our free research report helps visualize whether 301156 is currently undervalued by the market.
Is Shanghai Menon Animal Nutrition Technology making good use of its profits?
Shanghai Menon Animal Nutrition Technology’s median dividend payout ratio over the past three years is high at 82% (meaning the company only retains 18% of its profits), suggesting that the company’s earnings growth rate is low as a result of paying out most of its profits.
Shanghai Menon Animal Nutrition Technology only recently started paying a dividend, which means management may have decided that shareholders prioritise dividends over earnings growth.
Conclusion
Overall, there seem to be some positives in Shanghai Menon Animal Nutrition Technology’s business; specifically, strong earnings growth. However, we feel that the earnings growth figures could have been higher if the company had reinvested more of its earnings and paid less in dividends. While we don’t want to write the company off completely, we try to ascertain the risks in the business in order to make a more informed decision about it. Our risks dashboard shows 2 risks we have identified for Shanghai Menon Animal Nutrition Technology.
Valuation is complicated, but we can help make it simple.
To find out if Shanghai Menon Animal Nutrition Technology is overvalued or undervalued, take a look at our comprehensive analysis. Fair value estimates, risks and warnings, dividends, insider trading, financial strength.
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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
