Chengdu Screen Micro-electronicsLTD (SHSE:688053) has had a rough three months with its share price down 18%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Chengdu Screen Micro-electronicsLTD's ROE today.

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?

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 Chengdu Screen Micro-electronicsLTD is:

1.3% = CN¥22m ÷ CN¥1.7b (Based on the trailing twelve months to March 2024).

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¥0.01.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

A Side By Side comparison of Chengdu Screen Micro-electronicsLTD's Earnings Growth And 1.3% ROE

It is hard to argue that Chengdu Screen Micro-electronicsLTD's ROE is much good in and of itself. Not just that, even compared to the industry average of 6.3%, the company's ROE is entirely unremarkable. Therefore, Chengdu Screen Micro-electronicsLTD's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Chengdu Screen Micro-electronicsLTD's net income growth with the industry and found that the average industry growth rate was 6.4% in the same 5-year period.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is Chengdu Screen Micro-electronicsLTD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chengdu Screen Micro-electronicsLTD Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 98% (meaning, the company retains only 1.6% of profits) for Chengdu Screen Micro-electronicsLTD suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Conclusion

Overall, we would be extremely cautious before making any decision on Chengdu Screen Micro-electronicsLTD. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Chengdu Screen Micro-electronicsLTD's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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