Can Qingmu Digital Technology Co.,Ltd.'s (SZSE:301110) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Most readers would already be aware that Qingmu Digital TechnologyLtd's (SZSE:301110) stock increased significantly by 14% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Qingmu Digital TechnologyLtd's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Qingmu Digital TechnologyLtd

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 Qingmu Digital TechnologyLtd is:

4.0% = CN¥58m ÷ CN¥1.4b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 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.

Qingmu Digital TechnologyLtd's Earnings Growth And 4.0% ROE

As you can see, Qingmu Digital TechnologyLtd's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 4.2% either. Given the circumstances, the significant decline in net income by 14% seen by Qingmu Digital TechnologyLtd over the last five years is not surprising.

Next, on comparing with the industry net income growth, we found that Qingmu Digital TechnologyLtd's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 12% 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. Doing so will help them establish if the stock's future looks promising or ominous. Is Qingmu Digital TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Qingmu Digital TechnologyLtd Efficiently Re-investing Its Profits?

Qingmu Digital TechnologyLtd has a high three-year median payout ratio of 54% (that is, it is retaining 46% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 4 risks we have identified for Qingmu Digital TechnologyLtd visit our risks dashboard for free.

Additionally, Qingmu Digital TechnologyLtd started paying a dividend only recently. So it looks like the management may have perceived that shareholders favor dividends even though earnings have been in decline.

Summary

In total, we would have a hard think before deciding on any investment action concerning Qingmu Digital TechnologyLtd. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Qingmu Digital TechnologyLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.