Sunny Optical Technology (Group) (HKG:2382) had a tough three months with the share price falling 36%. But if you look closely, you might find that the strong financials could mean that the stock could potentially add value over the long term given how markets typically reward companies with good financial health. In this article, we decided to focus on the ROE of Sunny Optical Technology (group).
Return on equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In other words, it is a profitability metric that measures the return on capital provided by the company’s shareholders.
Try this chances and risks within the HK electronics industry.
How do you calculate return on equity?
That Formula for return on equity is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Sunny Optical Technology (Group) is:
18% = CN¥3.7b ÷ CN¥21b (Based on trailing 12 months to June 2022).
“Return” is the amount earned after tax over the past 12 months. This means that for every HK$ invested by its shareholders, the company generates a profit of HK$0.18.
Why is ROE important for earnings growth?
We have already established that ROE serves as an efficient profitable measure of a company’s future profits. Depending on how much of those earnings the company reinvests, or “retains,” and how effectively it does so, we can then assess a company’s earnings growth potential. Assuming all else remains the same, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Sunny Optical Technology (Group) earnings growth and 18% ROE
At first glance, Sunny Optical Technology (group) seems to have a decent ROE. Additionally, the company’s ROE compares fairly favorably to the industry average of 8.9%. This certainly contributes to Sunny Optical Technology (Group)’s healthy 16% net profit growth over the last five years.
Next, when comparing the industry net income growth, we found that the growth of Sunny Optical Technology (group) is quite high compared to the industry average growth of 9.1% over the same period, which is great to see.
Much of the basis for increasing the value of a company is 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). That way they have an idea of whether the stock is headed into clear blue waters or if swampy waters await them. A good indicator of expected earnings growth is P/E, which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you should check whether Sunny Optical Technology (Group) is trading at a high P/E or a low P/E relative to its industry.
Is Sunny Optical Technology (Group) using its profits efficiently?
In the case of Sunny Optical Technology (Group), the respectable earnings growth can probably be explained by its low three-year median payout ratio of 19% (or a retention ratio of 81%), which suggests the company invests most of its earnings to be expand business.
In addition, Sunny Optical Technology (Group) has been paying dividends for at least ten years. This shows that the company has an obligation to share profits with its shareholders. Studying the latest analyst consensus data, we found that the company is expected to continue paying out around 19% of its earnings over the next three years. Accordingly, forecasts indicate that the future ROE of Sunny Optical Technology (Group) will be 20%, which again is similar to the current ROE.
Overall, we are quite satisfied with the performance of Sunny Optical Technology (Group). We particularly like that the company reinvests a large portion of its profits with a high return. Naturally, this has resulted in the company being able to significantly increase its profits. Against this background, the latest analyst forecasts show that the company will continue to increase its profits. To learn more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
The assessment is complex, but we help to simplify it.
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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on 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.