Shenzhen Center Power Tech. Co., Ltd's (SZSE:002733) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Shenzhen Center Power Tech's (SZSE:002733) stock is up by a considerable 39% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Shenzhen Center Power Tech'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Shenzhen Center Power Tech

How Do You 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 Shenzhen Center Power Tech is:

3.0% = CN¥83m ÷ CN¥2.8b (Based on the trailing twelve months to September 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¥0.03 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Shenzhen Center Power Tech's Earnings Growth And 3.0% ROE

As you can see, Shenzhen Center Power Tech's ROE looks pretty weak. Not just that, even compared to the industry average of 6.5%, the company's ROE is entirely unremarkable. Therefore, Shenzhen Center Power Tech'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 Shenzhen Center Power Tech's net income growth with the industry and discovered that the industry saw an average growth of 10% in the same period.

Earnings growth is a huge factor in stock valuation. 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 002733 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Shenzhen Center Power Tech Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 42% (or a retention ratio of 58%), Shenzhen Center Power Tech hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Shenzhen Center Power Tech has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, we feel that the performance shown by Shenzhen Center Power Tech can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. To gain further insights into Shenzhen Center Power Tech's past profit growth, check out this visualization 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.