TKD Science and Technology Co.,Ltd.'s (SHSE:603738) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

TKD Science and TechnologyLtd (SHSE:603738) has had a great run on the share market with its stock up by a significant 9.3% over the last week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study TKD Science and TechnologyLtd's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for TKD Science and TechnologyLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for TKD Science and TechnologyLtd is:

6.4% = CN¥112m ÷ CN¥1.8b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.

Why Is ROE Important For 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.

TKD Science and TechnologyLtd's Earnings Growth And 6.4% ROE

At first glance, TKD Science and TechnologyLtd's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.9%. Moreover, we are quite pleased to see that TKD Science and TechnologyLtd's net income grew significantly at a rate of 27% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared TKD Science and TechnologyLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 12%.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is TKD Science and TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is TKD Science and TechnologyLtd Efficiently Re-investing Its Profits?

The three-year median payout ratio for TKD Science and TechnologyLtd is 34%, which is moderately low. The company is retaining the remaining 66%. By the looks of it, the dividend is well covered and TKD Science and TechnologyLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, TKD Science and TechnologyLtd has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we feel that TKD Science and TechnologyLtd certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for TKD Science and TechnologyLtd 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.