CIMC Safeway Technologies Co., Ltd.'s (SZSE:301559) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

CIMC Safeway Technologies (SZSE:301559) has had a great run on the share market with its stock up by a significant 5.5% over the last month. 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. Particularly, we will be paying attention to CIMC Safeway Technologies' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for CIMC Safeway Technologies

How To 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 CIMC Safeway Technologies is:

6.3% = CN¥287m ÷ CN¥4.6b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

CIMC Safeway Technologies' Earnings Growth And 6.3% ROE

When you first look at it, CIMC Safeway Technologies' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.3%. On the other hand, CIMC Safeway Technologies reported a moderate 5.1% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared CIMC Safeway Technologies' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.1% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about CIMC Safeway Technologies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CIMC Safeway Technologies Efficiently Re-investing Its Profits?

CIMC Safeway Technologies has a very high three-year median payout ratio of 115% suggesting that the company's shareholders are getting paid from more than just the company's earnings. Still the company's earnings have grown respectably. That being said, the high payout ratio could be worth keeping an eye on in case the company is unable to keep up its current growth momentum.

Along with seeing a growth in earnings, CIMC Safeway Technologies only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we would be extremely cautious before making any decision on CIMC Safeway Technologies. While the company has posted decent earnings growth, the company is retaining little to no profits and is reinvesting those profits at a low rate of return. This makes us doubtful if that growth could continue, especially if by any chance the business is faced with any sort of risk. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.