Stock Analysis

Tongda Smart Tech (Xiamen) Co., Ltd.'s (SZSE:001368) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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SZSE:001368

With its stock down 14% 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. In this article, we decided to focus on Tongda Smart Tech (Xiamen)'s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Tongda Smart Tech (Xiamen)

How Do You Calculate Return On Equity?

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 Tongda Smart Tech (Xiamen) is:

7.1% = CN¥102m ÷ CN¥1.4b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.07 in profit.

Why Is ROE Important For Earnings Growth?

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

Tongda Smart Tech (Xiamen)'s Earnings Growth And 7.1% ROE

At first glance, Tongda Smart Tech (Xiamen)'s ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.7%. On the other hand, Tongda Smart Tech (Xiamen) reported a moderate 9.2% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Tongda Smart Tech (Xiamen)'s net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 8.6% in the same 5-year period.

SZSE:001368 Past Earnings Growth June 6th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Tongda Smart Tech (Xiamen)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

Tongda Smart Tech (Xiamen) has a low three-year median payout ratio of 18%, meaning that the company retains the remaining 82% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Along with seeing a growth in earnings, Tongda Smart Tech (Xiamen) only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we feel that Tongda Smart Tech (Xiamen) certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Valuation is complex, but we're here to simplify it.

Discover if Tongda Smart Tech (Xiamen) might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.