Is Weakness In Imeik Technology Development Co.,Ltd. (SZSE:300896) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 11% over the past three months, it is easy to disregard Imeik Technology DevelopmentLtd (SZSE:300896). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Imeik Technology DevelopmentLtd's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Imeik Technology DevelopmentLtd

How Do You Calculate Return On Equity?

ROE 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 Imeik Technology DevelopmentLtd is:

28% = CN¥2.0b ÷ CN¥7.0b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.28 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Imeik Technology DevelopmentLtd's Earnings Growth And 28% ROE

To begin with, Imeik Technology DevelopmentLtd has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 5.8% also doesn't go unnoticed by us. As a result, Imeik Technology DevelopmentLtd's exceptional 39% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Imeik Technology DevelopmentLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 5.4% in the same 5-year period.

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. This then helps them determine if the stock is placed for a bright or bleak future. What is 300896 worth today? The intrinsic value infographic in our free research report helps visualize whether 300896 is currently mispriced by the market.

Is Imeik Technology DevelopmentLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Imeik Technology DevelopmentLtd is 48%, which is moderately low. The company is retaining the remaining 52%. By the looks of it, the dividend is well covered and Imeik Technology DevelopmentLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Imeik Technology DevelopmentLtd has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 39%. Accordingly, forecasts suggest that Imeik Technology DevelopmentLtd's future ROE will be 31% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that Imeik Technology DevelopmentLtd's performance has been quite good. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.