Is Profit Cultural and Creative Group Co., Ltd.'s (SZSE:300640) Recent Performance Underpinned By Weak Financials?

It is hard to get excited after looking at Profit Cultural and Creative Group's (SZSE:300640) recent performance, when its stock has declined 18% over the past month. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Profit Cultural and Creative Group'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Profit Cultural and Creative Group

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Profit Cultural and Creative Group is:

2.5% = CN¥21m ÷ CN¥820m (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 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. 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. 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 Profit Cultural and Creative Group's Earnings Growth And 2.5% ROE

As you can see, Profit Cultural and Creative Group's ROE looks pretty weak. Not just that, even compared to the industry average of 9.8%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 10% seen by Profit Cultural and Creative Group over the last five years is not surprising. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

That being said, we compared Profit Cultural and Creative Group's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 6.1% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Profit Cultural and Creative Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Profit Cultural and Creative Group Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 69% (implying that 31% of the profits are retained), most of Profit Cultural and Creative Group's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 5 risks we have identified for Profit Cultural and Creative Group visit our risks dashboard for free.

In addition, Profit Cultural and Creative Group has been paying dividends over a period of seven years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Profit Cultural and Creative Group. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Profit Cultural and Creative Group's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.