Nanjing CIGU Technology Corp.,LTD.'s (SHSE:688448) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Nanjing CIGU TechnologyLTD (SHSE:688448) has had a great run on the share market with its stock up by a significant 130% over the last three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Specifically, we decided to study Nanjing CIGU TechnologyLTD's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Nanjing CIGU TechnologyLTD

How Do You Calculate Return On Equity?

ROE 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 Nanjing CIGU TechnologyLTD is:

4.9% = CN¥49m ÷ CN¥998m (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 in profit.

What Has ROE Got To Do With 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. 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.

Nanjing CIGU TechnologyLTD's Earnings Growth And 4.9% ROE

On the face of it, Nanjing CIGU TechnologyLTD's ROE is not much to talk about. Next, when compared to the average industry ROE of 6.3%, the company's ROE leaves us feeling even less enthusiastic. Therefore, Nanjing CIGU TechnologyLTD's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Nanjing CIGU TechnologyLTD's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 7.3% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Nanjing CIGU TechnologyLTD is trading on a high P/E or a low P/E, relative to its industry.

Is Nanjing CIGU TechnologyLTD Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 67% (meaning, the company retains only 33% of profits) for Nanjing CIGU TechnologyLTD suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, Nanjing CIGU TechnologyLTD only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, Nanjing CIGU TechnologyLTD's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Nanjing CIGU TechnologyLTD and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.