Ningbo Ronbay New Energy Technology Co.,Ltd.’s (SHSE:688005) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

With its stock down 27% over the past three months, it is easy to disregard Ningbo Ronbay New Energy TechnologyLtd (SHSE:688005). However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Ningbo Ronbay New Energy TechnologyLtd’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. 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 Ningbo Ronbay New Energy TechnologyLtd

How Do You Calculate Return On Equity?

Return on equity 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 Ningbo Ronbay New Energy TechnologyLtd is:

2.6% = CN¥255m ÷ CN¥10.0b (Based on the trailing twelve months to June 2024).

The ‘return’ is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders’ equity, the company generated CN¥0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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.

Ningbo Ronbay New Energy TechnologyLtd’s Earnings Growth And 2.6% ROE

It is hard to argue that Ningbo Ronbay New Energy TechnologyLtd’s ROE is much good in and of itself. Even when compared to the industry average of 6.8%, the ROE figure is pretty disappointing. In spite of this, Ningbo Ronbay New Energy TechnologyLtd was able to grow its net income considerably, at a rate of 28% in the last 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.

We then compared Ningbo Ronbay New Energy TechnologyLtd’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 12% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Ningbo Ronbay New Energy TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Ningbo Ronbay New Energy TechnologyLtd Using Its Retained Earnings Effectively?

Ningbo Ronbay New Energy TechnologyLtd’s three-year median payout ratio to shareholders is 10.0%, which is quite low. This implies that the company is retaining 90% of its profits. So it looks like Ningbo Ronbay New Energy TechnologyLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Ningbo Ronbay New Energy TechnologyLtd has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 20% over the next three years. However, Ningbo Ronbay New Energy TechnologyLtd’s future ROE is expected to rise to 7.9% 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.

Conclusion

In total, it does look like Ningbo Ronbay New Energy TechnologyLtd 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. 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.

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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.