Kuangda Technology Group Co., Ltd. (SZSE:002516) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Kuangda Technology Group's (SZSE:002516) stock is up by a considerable 14% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Kuangda Technology Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Kuangda Technology Group

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 Kuangda Technology Group is:

4.6% = CN¥166m ÷ CN¥3.6b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 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. 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.

Kuangda Technology Group's Earnings Growth And 4.6% ROE

It is hard to argue that Kuangda Technology Group's ROE is much good in and of itself. Not just that, even compared to the industry average of 7.8%, the company's ROE is entirely unremarkable. Hence, the flat earnings seen by Kuangda Technology Group over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Kuangda Technology Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 1.7% in the same period.

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. If you're wondering about Kuangda Technology Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kuangda Technology Group Efficiently Re-investing Its Profits?

Kuangda Technology Group has a high three-year median payout ratio of 77% (or a retention ratio of 23%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Moreover, Kuangda Technology Group has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we feel that the performance shown by Kuangda Technology Group can be open to many interpretations. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Kuangda Technology Group's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.