Is Xuchang KETOP Testing Research Institute Co.,Ltd's (SZSE:003008) Recent Performance Underpinned By Weak Financials?

Xuchang KETOP Testing Research InstituteLtd (SZSE:003008) has had a rough week with its share price down 10%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on Xuchang KETOP Testing Research InstituteLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Xuchang KETOP Testing Research InstituteLtd

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 Xuchang KETOP Testing Research InstituteLtd is:

5.2% = CN¥56m ÷ CN¥1.1b (Based on the trailing twelve months to March 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¥0.05 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. 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.

Xuchang KETOP Testing Research InstituteLtd's Earnings Growth And 5.2% ROE

On the face of it, Xuchang KETOP Testing Research InstituteLtd's ROE is not much to talk about. However, its ROE is similar to the industry average of 6.2%, so we won't completely dismiss the company. Having said that, Xuchang KETOP Testing Research InstituteLtd's five year net income decline rate was 11%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

As a next step, we compared Xuchang KETOP Testing Research InstituteLtd's performance with the industry and found thatXuchang KETOP Testing Research InstituteLtd's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 0.07% in the same period, which is a slower than the company.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Xuchang KETOP Testing Research InstituteLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Xuchang KETOP Testing Research InstituteLtd Efficiently Re-investing Its Profits?

Xuchang KETOP Testing Research InstituteLtd has a high three-year median payout ratio of 62% (that is, it is retaining 38% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 4 risks we have identified for Xuchang KETOP Testing Research InstituteLtd by visiting our risks dashboard for free on our platform here.

In addition, Xuchang KETOP Testing Research InstituteLtd has been paying dividends over a period of three years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Summary

In total, we would have a hard think before deciding on any investment action concerning Xuchang KETOP Testing Research InstituteLtd. 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. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Xuchang KETOP Testing Research InstituteLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com