Xiamen Comfort Science&Technology Group Co., Ltd's (SZSE:002614) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Xiamen Comfort Science&Technology Group's (SZSE:002614) stock is up by a considerable 16% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on Xiamen Comfort Science&Technology Group's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How To Calculate Return On Equity?

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 Xiamen Comfort Science&Technology Group is:

1.3% = CN¥59m ÷ CN¥4.5b (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¥0.01 in profit.

Check out our latest analysis for Xiamen Comfort Science&Technology Group

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.

Xiamen Comfort Science&Technology Group's Earnings Growth And 1.3% ROE

As you can see, Xiamen Comfort Science&Technology Group's ROE looks pretty weak. Not just that, even compared to the industry average of 7.3%, the company's ROE is entirely unremarkable. For this reason, Xiamen Comfort Science&Technology Group's five year net income decline of 28% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

As a next step, we compared Xiamen Comfort Science&Technology Group's performance with the industry and found thatXiamen Comfort Science&Technology Group's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 3.8% 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. 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 Xiamen Comfort Science&Technology Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Xiamen Comfort Science&Technology Group Using Its Retained Earnings Effectively?

Xiamen Comfort Science&Technology Group's very high three-year median payout ratio of 151% over the last three years suggests that the company is paying its shareholders more than what it is earning and this explains the company's shrinking earnings. Its usually very hard to sustain dividend payments that are higher than reported profits. Our risks dashboard should have the 3 risks we have identified for Xiamen Comfort Science&Technology Group.

In addition, Xiamen Comfort Science&Technology Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we would be extremely cautious before making any decision on Xiamen Comfort Science&Technology Group. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.