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Chinese Academy of Sciences Chengdu Information Technology Co., Ltd. (SZSE: 300678) has had a rough week, with its share price down 13%. However, we decided to look into the company’s financials to determine if they were related to the price drop. Stock prices are often driven by a company’s long-term financial performance, so we decided to focus more on a company’s financial performance. Today we pay special attention to the ROE of Chinese Academy of Sciences Chengdu Information Technology Co., Ltd.
ROE, or return on equity, is a useful tool for evaluating how effectively a company generates returns on the investment it receives from shareholders. In other words, it reveals the company’s success in converting shareholder investments into profits.
Check out our latest analysis for Chinese Academy of Sciences Chengdu Information Technology Co Ltd
How to calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net profit (from continuing operations) ÷ Shareholders’ equity
Therefore, according to the above formula, the ROE of Chinese Academy of Sciences Chengdu Information Technology Co., Ltd. is:
4.8% = RMB 41 million ÷ RMB 850 million (based on the trailing 12 months to December 2023).
The “return” is the revenue the business earned last year. Therefore, this means that for every RMB 1 invested by shareholders, the company will earn RMB 0.05 in profit.
What is the relationship between ROE and earnings growth?
So far, we have 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, giving us a sense of the company’s growth potential. Assuming all else is equal, companies that have a higher return on equity and higher profit retention generally have a higher growth rate compared to companies that don’t have the same characteristics.
Chinese Academy of Sciences Chengdu Information Technology Co., Ltd. profit growth ROE 4.8%
As you can see, CAS Chengdu Information Technology Co., Ltd.’s ROE looks quite weak. Comparison with the industry shows that the company’s ROE is comparable to the industry average ROE of 5.2%. Therefore, the low return on equity undoubtedly provides a certain background for the net profit of Chinese Academy of Sciences Chengdu Information Technology Co., Ltd. to grow only 2.3% in the past five years.
Next, comparing with the industry’s net profit growth rate, we found that the reported growth rate of the Chinese Academy of Sciences Chengdu Information Technology Co., Ltd. was lower than the industry’s 6.6% growth rate in the past few years, which is not what we want to see.
The basis of a company’s value is largely tied to its earnings growth. Investors should try to determine whether expected earnings growth or decline (in either case) is priced in. By doing this, they will know if the stock will enter clear blue water or if it will get bogged down in the swamp. A good indicator of expected earnings growth is the price-to-earnings ratio, which determines the price the market is willing to pay for a stock based on its earnings prospects. So you might want to check whether Chinese Academy of Sciences Chengdu Information Technology Co., Ltd.’s P/E ratio is high or low relative to its industry.
Are the retained earnings of Chinese Academy of Sciences Chengdu Information Technology Co., Ltd. effectively used?
The three-year median payout ratio is lower at 19% (meaning the company retains the remaining 81% of revenue), indicating that CAS Chengdu Information Technology Co., Ltd. retains the majority of its profits. However, the lower earnings growth number does not reflect this fact. Therefore, there may be some other explanations in this regard. For example, a company’s business may be deteriorating.
In addition, CAS Chengdu Information Technology Co., Ltd. has paid dividends for six consecutive years, showing that maintaining dividends is more important to management, even if it comes at the expense of business growth.
in conclusion
Overall, we’re a bit ambivalent about CAS Chengdu Information Technology Co., Ltd.’s performance. While the company does have a high reinvestment rate, the lower ROE means that all the reinvestment doesn’t do investors any good and has a negative impact on earnings growth. All in all, we would approach this company with caution, and one way to do that is to look at the company’s risk profile. To learn about the 1 risks we have identified for CAS Chengdu Information Technology Co., Ltd., visit our risks dashboard for free.
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This article from Simply Wall St is general in nature. We only use unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended to provide financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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