With its stock down 19% over the past three months, it is easy to disregard Shenzhen Fortune Trend technology (SHSE:688318). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Shenzhen Fortune Trend 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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 Shenzhen Fortune Trend technology is:
8.6% = CN¥285m ÷ CN¥3.3b (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.09.
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. 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.
Shenzhen Fortune Trend technology's Earnings Growth And 8.6% ROE
At first glance, Shenzhen Fortune Trend technology's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 4.4% which we definitely can't overlook. However, Shenzhen Fortune Trend technology's five year net income growth was quite low averaging at only 3.2%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.
Next, on comparing with the industry net income growth, we found that Shenzhen Fortune Trend technology's reported growth was lower than the industry growth of 4.8% over the last few years, which is not something we like to see.
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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Shenzhen Fortune Trend technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Shenzhen Fortune Trend technology Making Efficient Use Of Its Profits?
Despite having a normal three-year median payout ratio of 30% (or a retention ratio of 70% over the past three years, Shenzhen Fortune Trend technology has seen very little growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Moreover, Shenzhen Fortune Trend technology has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Conclusion
On the whole, we do feel that Shenzhen Fortune Trend technology has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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 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.
