Keli Sensing Technology (Ningbo) Co.,Ltd.'s (SHSE:603662) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Keli Sensing Technology (Ningbo)Ltd's (SHSE:603662) stock increased significantly by 45% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Keli Sensing Technology (Ningbo)Ltd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Keli Sensing Technology (Ningbo)Ltd

How To Calculate Return On Equity?

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 Keli Sensing Technology (Ningbo)Ltd is:

11% = CN¥317m ÷ CN¥2.9b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.11 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Keli Sensing Technology (Ningbo)Ltd's Earnings Growth And 11% ROE

When you first look at it, Keli Sensing Technology (Ningbo)Ltd's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 6.6%, is definitely interesting. This probably goes some way in explaining Keli Sensing Technology (Ningbo)Ltd's moderate 11% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing Keli Sensing Technology (Ningbo)Ltd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 11% 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 Keli Sensing Technology (Ningbo)Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Keli Sensing Technology (Ningbo)Ltd Using Its Retained Earnings Effectively?

Keli Sensing Technology (Ningbo)Ltd has a three-year median payout ratio of 30%, which implies that it retains the remaining 70% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Keli Sensing Technology (Ningbo)Ltd is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 34%. Regardless, the future ROE for Keli Sensing Technology (Ningbo)Ltd is predicted to rise to 14% despite there being not much change expected in its payout ratio.

Summary

Overall, we are quite pleased with Keli Sensing Technology (Ningbo)Ltd's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.