Weak Financial Prospects Seem To Be Dragging Down Shenzhen VAPEL Power Supply Technology Co., Ltd. (SZSE:301516) Stock

Shenzhen VAPEL Power Supply Technology (SZSE:301516) has had a rough month with its share price down 20%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Shenzhen VAPEL Power Supply Technology's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Shenzhen VAPEL Power Supply Technology

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 Shenzhen VAPEL Power Supply Technology is:

2.9% = CN¥42m ÷ CN¥1.5b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Shenzhen VAPEL Power Supply Technology's Earnings Growth And 2.9% ROE

As you can see, Shenzhen VAPEL Power Supply Technology's ROE looks pretty weak. Even when compared to the industry average of 6.9%, the ROE figure is pretty disappointing. Therefore, Shenzhen VAPEL Power Supply Technology's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Shenzhen VAPEL Power Supply Technology's net income growth with the industry and found that the average industry growth rate was 12% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Shenzhen VAPEL Power Supply Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shenzhen VAPEL Power Supply Technology Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 79% (implying that the company keeps only 21% of its income) of its business to reinvest into its business), most of Shenzhen VAPEL Power Supply Technology's profits are being paid to shareholders, which explains the absence of growth in earnings.

Conclusion

On the whole, Shenzhen VAPEL Power Supply Technology'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. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Shenzhen VAPEL Power Supply Technology's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.