Shanghai Bloom Technology Inc's (SHSE:603325) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 20% over the past three months, it is easy to disregard Shanghai Bloom Technology (SHSE:603325). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Shanghai Bloom Technology's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Shanghai Bloom Technology

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 Bloom Technology is:

11% = CN¥253m ÷ CN¥2.3b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.11.

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. 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.

Shanghai Bloom Technology's Earnings Growth And 11% ROE

To begin with, Shanghai Bloom Technology seems to have a respectable ROE. Especially when compared to the industry average of 7.0% the company's ROE looks pretty impressive. This certainly adds some context to Shanghai Bloom Technology's exceptional 23% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Shanghai Bloom Technology's growth is quite high when compared to the industry average growth of 9.2% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Bloom Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Shanghai Bloom Technology Efficiently Re-investing Its Profits?

Shanghai Bloom Technology's three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. So it seems that Shanghai Bloom Technology is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 31% of its profits over the next three years. As a result, Shanghai Bloom Technology's ROE is not expected to change by much either, which we inferred from the analyst estimate of 12% for future ROE.

Summary

Overall, we are quite pleased with Shanghai Bloom Technology's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.