Weak Financial Prospects Seem To Be Dragging Down Kuangda Technology Group Co., Ltd. (SZSE:002516) Stock

It is hard to get excited after looking at Kuangda Technology Group's (SZSE:002516) recent performance, when its stock has declined 9.1% over the past three months. 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. Specifically, we decided to study Kuangda Technology Group's ROE in this article.

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.

View our latest analysis for Kuangda Technology Group

How Do You Calculate Return On Equity?

ROE 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:

4.1% = CN¥147m ÷ CN¥3.6b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Kuangda Technology Group's Earnings Growth And 4.1% ROE

As you can see, Kuangda Technology Group's ROE looks pretty weak. Not just that, even compared to the industry average of 6.9%, the company's ROE is entirely unremarkable. Therefore, Kuangda Technology Group's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Kuangda Technology Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 2.8% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Kuangda Technology Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kuangda Technology Group Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 78% (meaning, the company retains only 22% of profits) for Kuangda Technology Group suggests that the company's earnings growth was miniscule as a result of paying out a majority of 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.

Summary

On the whole, Kuangda Technology Group's performance is quite a big let-down. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Kuangda Technology Group and see how it has performed in the past by looking at this FREE detailed graph 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.