Can Mixed Fundamentals Have A Negative Impact on Cscec Scimee Sci.&Tech. Co.,Ltd (SZSE:300425) Current Share Price Momentum?

Cscec Scimee Sci.&Tech.Ltd (SZSE:300425) has had a great run on the share market with its stock up by a significant 11% over the last week. 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. Particularly, we will be paying attention to Cscec Scimee Sci.&Tech.Ltd's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Cscec Scimee Sci.&Tech.Ltd

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 Cscec Scimee Sci.&Tech.Ltd is:

6.5% = CN¥162m ÷ CN¥2.5b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned 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¥0.06 in profit.

Why Is ROE Important For Earnings Growth?

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

Cscec Scimee Sci.&Tech.Ltd's Earnings Growth And 6.5% ROE

On the face of it, Cscec Scimee Sci.&Tech.Ltd's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 7.0%, we may spare it some thought. On the other hand, Cscec Scimee Sci.&Tech.Ltd reported a fairly low 3.7% net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.

We then compared Cscec Scimee Sci.&Tech.Ltd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.8% in the same 5-year period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Cscec Scimee Sci.&Tech.Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Cscec Scimee Sci.&Tech.Ltd Efficiently Re-investing Its Profits?

Cscec Scimee Sci.&Tech.Ltd has a low three-year median payout ratio of 21% (meaning, the company keeps the remaining 79% of profits) which means that the company is retaining more of its earnings. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Cscec Scimee Sci.&Tech.Ltd has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we're a bit ambivalent about Cscec Scimee Sci.&Tech.Ltd's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 1 risk we have identified for Cscec Scimee Sci.&Tech.Ltd 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.