Declining Stock and Decent Financials: Is The Market Wrong About Hicon Network Technology (Shandong) Co.,Ltd. (SZSE:301262)?

With its stock down 30% over the past three months, it is easy to disregard Hicon Network Technology (Shandong)Ltd (SZSE:301262). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Hicon Network Technology (Shandong)Ltd'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Hicon Network Technology (Shandong)Ltd

How Do You 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 Hicon Network Technology (Shandong)Ltd is:

12% = CN¥412m ÷ CN¥3.5b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 in profit.

Why Is ROE Important For 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 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.

Hicon Network Technology (Shandong)Ltd's Earnings Growth And 12% ROE

To begin with, Hicon Network Technology (Shandong)Ltd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.4%. However, we are curious as to how the high returns still resulted in flat growth for Hicon Network Technology (Shandong)Ltd in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Hicon Network Technology (Shandong)Ltd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 1.9% in the same period.

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. Is Hicon Network Technology (Shandong)Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hicon Network Technology (Shandong)Ltd Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 92% (implying that the company keeps only 8.2% of its income) of its business to reinvest into its business), most of Hicon Network Technology (Shandong)Ltd's profits are being paid to shareholders, which explains the absence of growth in earnings.

Only recently, Hicon Network Technology (Shandong)Ltd started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Summary

In total, it does look like Hicon Network Technology (Shandong)Ltd has some positive aspects to its business. The company has grown its earnings moderately as a result of its impressive ROE. Yet, the business is retaining hardly any of its profits. This might have negative implications on the company's future growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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