Shenzhen KSTAR Science and Technology Co., Ltd.'s (SZSE:002518) Stock Is Going Strong: Is the Market Following Fundamentals?

Shenzhen KSTAR Science and Technology (SZSE:002518) has had a great run on the share market with its stock up by a significant 25% over the last 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 Shenzhen KSTAR Science and 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.

See our latest analysis for Shenzhen KSTAR Science and Technology

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Shenzhen KSTAR Science and Technology is:

11% = CN¥508m ÷ CN¥4.4b (Based on the trailing twelve months to September 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 Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Shenzhen KSTAR Science and Technology's Earnings Growth And 11% ROE

To begin with, Shenzhen KSTAR Science and Technology seems to have a respectable ROE. Especially when compared to the industry average of 6.5% the company's ROE looks pretty impressive. Probably as a result of this, Shenzhen KSTAR Science and Technology was able to see an impressive net income growth of 23% over the last five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Shenzhen KSTAR Science and Technology'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 10%.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Shenzhen KSTAR Science and Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shenzhen KSTAR Science and Technology Making Efficient Use Of Its Profits?

Shenzhen KSTAR Science and Technology has a three-year median payout ratio of 33% (where it is retaining 67% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Shenzhen KSTAR Science and Technology is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Shenzhen KSTAR Science and Technology has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Shenzhen KSTAR Science and Technology's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.