Should Weakness in Focus Media Information Technology Co., Ltd.'s (SZSE:002027) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 17% over the past three months, it is easy to disregard Focus Media Information Technology (SZSE:002027). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Focus Media Information Technology's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Focus Media Information Technology

How Is ROE Calculated?

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 Focus Media Information Technology is:

26% = CN¥4.9b ÷ CN¥19b (Based on the trailing twelve months to March 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¥0.26 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. 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.

A Side By Side comparison of Focus Media Information Technology's Earnings Growth And 26% ROE

Firstly, we acknowledge that Focus Media Information Technology has a significantly high ROE. Secondly, even when compared to the industry average of 4.9% the company's ROE is quite impressive. This probably laid the groundwork for Focus Media Information Technology's moderate 7.7% net income growth seen over the past five years.

As a next step, we compared Focus Media 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 1.8%.

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. This then helps them determine if the stock is placed for a bright or bleak future. What is 002027 worth today? The intrinsic value infographic in our free research report helps visualize whether 002027 is currently mispriced by the market.

Is Focus Media Information Technology Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 95% (or a retention ratio of 5.1%) for Focus Media Information Technology suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Focus Media Information Technology has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 94%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 30%.

Summary

Overall, we feel that Focus Media Information Technology certainly does have some positive factors to consider. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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