Beijing Centergate Technologies (holding) Co., Ltd.'s (SZSE:000931) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Beijing Centergate Technologies (holding)'s (SZSE:000931) stock is up by a considerable 33% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Beijing Centergate Technologies (holding)'s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Beijing Centergate Technologies (holding)

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 Beijing Centergate Technologies (holding) is:

4.1% = CN¥73m ÷ CN¥1.8b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. 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 Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Beijing Centergate Technologies (holding)'s Earnings Growth And 4.1% ROE

It is quite clear that Beijing Centergate Technologies (holding)'s ROE is rather low. However, the fact that it is higher than the industry average of 3.3% makes us a bit more interested. Or may be not, given Beijing Centergate Technologies (holding)'s five year net income decline of 30% in the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the shrinking earnings.

As a next step, we compared Beijing Centergate Technologies (holding)'s performance with the industry and found thatBeijing Centergate Technologies (holding)'s performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 7.2% in the same period, which is a slower than the company.

Earnings growth is a huge factor in stock valuation. 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 Beijing Centergate Technologies (holding) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Beijing Centergate Technologies (holding) Making Efficient Use Of Its Profits?

Because Beijing Centergate Technologies (holding) doesn't pay any regular dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

Overall, we feel that Beijing Centergate Technologies (holding) certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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. To know the 2 risks we have identified for Beijing Centergate Technologies (holding) visit our risks dashboard for free.

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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.