Declining Stock and Decent Financials: Is The Market Wrong About Tongda Smart Tech (Xiamen) Co., Ltd. (SZSE:001368)?

With its stock down 10% over the past week, it is easy to disregard Tongda Smart Tech (Xiamen) (SZSE:001368). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Tongda Smart Tech (Xiamen)'s ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Tongda Smart Tech (Xiamen)

How Is ROE Calculated?

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 Tongda Smart Tech (Xiamen) is:

7.4% = CN¥104m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Tongda Smart Tech (Xiamen)'s Earnings Growth And 7.4% ROE

When you first look at it, Tongda Smart Tech (Xiamen)'s ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.6%. On the other hand, Tongda Smart Tech (Xiamen) reported a moderate 6.2% net income growth over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Tongda Smart Tech (Xiamen) compares quite favourably to the industry average, which shows a decline of 3.4% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Tongda Smart Tech (Xiamen) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tongda Smart Tech (Xiamen) Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 51% (or a retention ratio of 49%) for Tongda Smart Tech (Xiamen) suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

While Tongda Smart Tech (Xiamen) has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

In total, it does look like Tongda Smart Tech (Xiamen) has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.