Are Wangsu Science & Technology Co.,Ltd.’s (SZSE:300017) Mixed Financials Driving The Negative Sentiment?

With its stock down 12% over the past month, it is easy to disregard Wangsu Science & TechnologyLtd (SZSE:300017). We, however decided to study the company’s financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it’s worth paying close attention. Specifically, we decided to study Wangsu Science & TechnologyLtd’s ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

View our latest analysis for Wangsu Science & TechnologyLtd

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Wangsu Science & TechnologyLtd is:

4.6% = CN¥434m ÷ CN¥9.5b (Based on the trailing twelve months to September 2023).

The ‘return’ is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Wangsu Science & TechnologyLtd’s Earnings Growth And 4.6% ROE

It is quite clear that Wangsu Science & TechnologyLtd’s ROE is rather low. Further, we noted that the company’s ROE is similar to the industry average of 5.1%. Given the low ROE Wangsu Science & TechnologyLtd’s five year net income decline of 24% is not surprising.

However, when we compared Wangsu Science & TechnologyLtd’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 6.8% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Wangsu Science & TechnologyLtd’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wangsu Science & TechnologyLtd Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 33% (that is, a retention ratio of 67%), the fact that Wangsu Science & TechnologyLtd’s earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Wangsu Science & TechnologyLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 26% over the next three years. The fact that the company’s ROE is expected to rise to 6.3% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we have mixed feelings about Wangsu Science & TechnologyLtd. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at current analyst estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.