Has Shanghai Menon Animal Nutrition Technology Co., Ltd.’s (SZSE:301156) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Shanghai Menon Animal Nutrition Technology’s (SZSE:301156) stock increased significantly by 15% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Shanghai Menon Animal Nutrition Technology’s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.

View our latest analysis for Shanghai Menon Animal Nutrition Technology

How Is ROE Calculated?

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 Shanghai Menon Animal Nutrition Technology is:

7.9% = CN¥63m ÷ CN¥803m (Based on the trailing twelve months to March 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¥0.08 in profit.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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 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.

Shanghai Menon Animal Nutrition Technology’s Earnings Growth And 7.9% ROE

At first glance, Shanghai Menon Animal Nutrition Technology’s ROE doesn’t look very promising. However, its ROE is similar to the industry average of 8.1%, so we won’t completely dismiss the company. We can see that Shanghai Menon Animal Nutrition Technology has grown at a five year net income growth average rate of 4.0%, which is a bit on the lower side. Remember, the company’s ROE is not particularly great to begin with. So this could also be one of the reasons behind the company’s low growth in earnings.

As a next step, we compared Shanghai Menon Animal Nutrition Technology’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 2.9%.

Earnings growth is a huge factor in stock valuation. 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. What is 301156 worth today? The intrinsic value infographic in our free research report helps visualize whether 301156 is currently mispriced by the market.

Is Shanghai Menon Animal Nutrition Technology Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 82% (that is, the company retains only 18% of its income) over the past three years for Shanghai Menon Animal Nutrition Technology suggests that the company’s earnings growth was lower as a result of paying out a majority of its earnings.

Only recently, Shanghai Menon Animal Nutrition Technology started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Conclusion

In total, it does look like Shanghai Menon Animal Nutrition Technology has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Shanghai Menon Animal Nutrition Technology.

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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.