Is Qingdao Kutesmart Co.,Ltd.'s (SZSE:300840) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Qingdao KutesmartLtd's (SZSE:300840) stock increased significantly by 21% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Qingdao KutesmartLtd'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.

Check out our latest analysis for Qingdao KutesmartLtd

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 Qingdao KutesmartLtd is:

13% = CN¥169m ÷ CN¥1.3b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Qingdao KutesmartLtd's Earnings Growth And 13% ROE

To begin with, Qingdao KutesmartLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.9%. This certainly adds some context to Qingdao KutesmartLtd's exceptional 23% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Qingdao KutesmartLtd's growth is quite high when compared to the industry average growth of 2.8% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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 Qingdao KutesmartLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Qingdao KutesmartLtd Making Efficient Use Of Its Profits?

Qingdao KutesmartLtd has a really low three-year median payout ratio of 9.4%, meaning that it has the remaining 91% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Qingdao KutesmartLtd has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with Qingdao KutesmartLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard will have the 1 risk we have identified for Qingdao KutesmartLtd.

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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.