Shanghai DOBE Cultural & Creative Industry Development (Group)Co (SZSE:300947) has had a great run on the share market with its stock up by a significant 25% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Shanghai DOBE Cultural & Creative Industry Development (Group)Co's ROE in this article.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Is ROE Calculated?

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 Shanghai DOBE Cultural & Creative Industry Development (Group)Co is:

2.8% = CN¥38m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 in profit.

What Is The Relationship Between ROE And 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. 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 Shanghai DOBE Cultural & Creative Industry Development (Group)Co's Earnings Growth And 2.8% ROE

It is hard to argue that Shanghai DOBE Cultural & Creative Industry Development (Group)Co's ROE is much good in and of itself. Even when compared to the industry average of 3.8%, the ROE figure is pretty disappointing. For this reason, Shanghai DOBE Cultural & Creative Industry Development (Group)Co's five year net income decline of 37% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

As a next step, we compared Shanghai DOBE Cultural & Creative Industry Development (Group)Co's performance with the industry and found thatShanghai DOBE Cultural & Creative Industry Development (Group)Co's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 11% in the same period, which is a slower than the company.

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. 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 Shanghai DOBE Cultural & Creative Industry Development (Group)Co is trading on a high P/E or a low P/E, relative to its industry.

Is Shanghai DOBE Cultural & Creative Industry Development (Group)Co Making Efficient Use Of Its Profits?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a regular dividend. This implies that potentially all of its profits are being reinvested in the business.

Summary

Overall, we have mixed feelings about Shanghai DOBE Cultural & Creative Industry Development (Group)Co. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Shanghai DOBE Cultural & Creative Industry Development (Group)Co visit our risks dashboard for free.

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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.