Shanghai DOBE Cultural & Creative Industry Development (Group)Co. LTD. (SZSE:300947) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Shanghai DOBE Cultural & Creative Industry Development (Group)Co (SZSE:300947) has had a great run on the share market with its stock up by a significant 15% over the last month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Shanghai DOBE Cultural & Creative Industry Development (Group)Co'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.

Check out our latest analysis for Shanghai DOBE Cultural & Creative Industry Development (Group)Co

How Is ROE Calculated?

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 Shanghai DOBE Cultural & Creative Industry Development (Group)Co is:

2.8% = CN¥38m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.03 in profit.

What Has ROE Got To Do With 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 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.

Shanghai DOBE Cultural & Creative Industry Development (Group)Co's Earnings Growth And 2.8% ROE

It is hard to argue that Shanghai DOBE Cultural & Creative Industry Development (Group)Co's ROE is much good in and of itself. Not just that, even compared to the industry average of 3.8%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 37% seen by Shanghai DOBE Cultural & Creative Industry Development (Group)Co was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

As a next step, we compared Shanghai DOBE Cultural & Creative Industry Development (Group)Co's performance with the industry and found thatShanghai DOBE Cultural & Creative Industry Development (Group)Co's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 11% in the same period, which is a slower than the company.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Shanghai DOBE Cultural & Creative Industry Development (Group)Co fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai DOBE Cultural & Creative Industry Development (Group)Co Efficiently Re-investing Its Profits?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a regular dividend. This implies that potentially all of its profits are being reinvested in the business.

Conclusion

Overall, we have mixed feelings about Shanghai DOBE Cultural & Creative Industry Development (Group)Co. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 3 risks we have identified for Shanghai DOBE Cultural & Creative Industry Development (Group)Co.

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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.