FSPG Hi-Tech CO., Ltd.'s (SZSE:000973) Stock Is Going Strong: Have Financials A Role To Play?

FSPG Hi-Tech's (SZSE:000973) stock is up by a considerable 98% over the past 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 FSPG Hi-Tech'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for FSPG Hi-Tech

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for FSPG Hi-Tech is:

3.6% = CN¥123m ÷ CN¥3.5b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

FSPG Hi-Tech's Earnings Growth And 3.6% ROE

It is quite clear that FSPG Hi-Tech's ROE is rather low. Even compared to the average industry ROE of 6.2%, the company's ROE is quite dismal. Despite this, surprisingly, FSPG Hi-Tech saw an exceptional 23% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared FSPG Hi-Tech'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 4.9%.

Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if FSPG Hi-Tech is trading on a high P/E or a low P/E, relative to its industry.

Is FSPG Hi-Tech Efficiently Re-investing Its Profits?

FSPG Hi-Tech has a three-year median payout ratio of 30% (where it is retaining 70% of its income) which is not too low or not too high. So it seems that FSPG Hi-Tech is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, FSPG Hi-Tech is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we do feel that FSPG Hi-Tech has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 4 risks we have identified for FSPG Hi-Tech.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.