Sunny Optical Technology (Group) Company Limited (HKG:2382) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

Sunny Optical Technology (Group) (HKG:2382) has had a rough three months with its share price down 36%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Sunny Optical Technology (Group)’s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

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How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Sunny Optical Technology (Group) is:

18% = CN¥3.7b ÷ CN¥21b (Based on the trailing twelve months to June 2022).

The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every HK$1 of its shareholder’s investments, 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 profit-generating gauge for a company’s future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

Sunny Optical Technology (Group)’s Earnings Growth And 18% ROE

At first glance, Sunny Optical Technology (Group) seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 8.9%. This certainly adds some context to Sunny Optical Technology (Group)’s decent 16% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Sunny Optical Technology (Group)’s growth is quite high when compared to the industry average growth of 9.1% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, 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). 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 Sunny Optical Technology (Group) is trading on a high P/E or a low P/E, relative to its industry.

Is Sunny Optical Technology (Group) Making Efficient Use Of Its Profits?

In Sunny Optical Technology (Group)’s case, its 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 that the company is investing most of its profits to grow its business.

Besides, Sunny Optical Technology (Group) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 19% of its profits over the next three years. Accordingly, forecasts suggest that Sunny Optical Technology (Group)’s future ROE will be 20% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Sunny Optical Technology (Group)’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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 into account 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.