Most readers would already be aware that Guangdong Tecsun Science & TechnologyLtd's (SZSE:002908) stock increased significantly by 14% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Guangdong Tecsun Science & TechnologyLtd's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 Guangdong Tecsun Science & TechnologyLtd is:
3.3% = CN¥39m ÷ CN¥1.2b (Based on the trailing twelve months to September 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¥0.03 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. 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.
A Side By Side comparison of Guangdong Tecsun Science & TechnologyLtd's Earnings Growth And 3.3% ROE
It is quite clear that Guangdong Tecsun Science & TechnologyLtd's ROE is rather low. Even when compared to the industry average of 6.3%, the ROE figure is pretty disappointing. For this reason, Guangdong Tecsun Science & TechnologyLtd's five year net income decline of 2.0% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.
So, as a next step, we compared Guangdong Tecsun Science & TechnologyLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 3.9% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Guangdong Tecsun Science & TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Guangdong Tecsun Science & TechnologyLtd Making Efficient Use Of Its Profits?
In spite of a normal three-year median payout ratio of 26% (that is, a retention ratio of 74%), the fact that Guangdong Tecsun Science & TechnologyLtd's earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
In addition, Guangdong Tecsun Science & TechnologyLtd has been paying dividends over a period of seven years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.
Conclusion
In total, we're a bit ambivalent about Guangdong Tecsun Science & TechnologyLtd's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its 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. Our risks dashboard would have the 2 risks we have identified for Guangdong Tecsun Science & TechnologyLtd.
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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.
