It is hard to get excited after looking at Chengdu Information Technology of Chinese Academy of SciencesLtd's (SZSE:300678) recent performance, when its stock has declined 23% over the past three months. 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. In this article, we decided to focus on Chengdu Information Technology of Chinese Academy of SciencesLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How To 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 Chengdu Information Technology of Chinese Academy of SciencesLtd is:

4.4% = CN¥39m ÷ CN¥871m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Chengdu Information Technology of Chinese Academy of SciencesLtd's Earnings Growth And 4.4% ROE

It is quite clear that Chengdu Information Technology of Chinese Academy of SciencesLtd's ROE is rather low. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 5.2%. Chengdu Information Technology of Chinese Academy of SciencesLtd's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that Chengdu Information Technology of Chinese Academy of SciencesLtd's reported growth was lower than the industry growth of 3.7% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Chengdu Information Technology of Chinese Academy of SciencesLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chengdu Information Technology of Chinese Academy of SciencesLtd Making Efficient Use Of Its Profits?

Chengdu Information Technology of Chinese Academy of SciencesLtd has a low three-year median payout ratio of 20% (or a retention ratio of 80%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Chengdu Information Technology of Chinese Academy of SciencesLtd has been paying dividends over a period of six years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, we're a bit ambivalent about Chengdu Information Technology of Chinese Academy of SciencesLtd's performance. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Chengdu Information Technology of Chinese Academy of SciencesLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com