Has Longmaster Information & Technology Co., Ltd.'s (SZSE:300288) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Longmaster Information & Technology (SZSE:300288) has had a great run on the share market with its stock up by a significant 43% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Longmaster Information & Technology's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Longmaster Information & Technology

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 Longmaster Information & Technology is:

3.7% = CN¥61m ÷ CN¥1.7b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

What Has ROE Got To Do With 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.

Longmaster Information & Technology's Earnings Growth And 3.7% ROE

It is hard to argue that Longmaster Information & Technology's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 3.7% either. Thus, the low ROE certainly provides some context to Longmaster Information & Technology's very little net income growth of 2.5% seen over the past five years.

As a next step, we compared Longmaster Information & Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 1.3%.

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Longmaster Information & Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Longmaster Information & Technology Making Efficient Use Of Its Profits?

A low three-year median payout ratio of 11% (implying that the company retains the remaining 89% of its income) suggests that Longmaster Information & Technology is retaining most of its profits. This should be reflected in its earnings growth number, but that's not the case. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Longmaster Information & Technology has paid dividends over a period of eight years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, it does look like Longmaster Information & Technology has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings.

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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.