Does Smartsens Technology (Shanghai) Co., Ltd.'s (SHSE:688213) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Smartsens Technology (Shanghai)'s (SHSE:688213) stock is up by a considerable 64% over the past month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study Smartsens Technology (Shanghai)'s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Smartsens Technology (Shanghai)

How Do You Calculate Return On Equity?

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 Smartsens Technology (Shanghai) is:

5.9% = CN¥230m ÷ CN¥3.9b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.06 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. 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.

A Side By Side comparison of Smartsens Technology (Shanghai)'s Earnings Growth And 5.9% ROE

On the face of it, Smartsens Technology (Shanghai)'s ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.8%. We can see that Smartsens Technology (Shanghai) has grown at a five year net income growth average rate of 2.1%, which is a bit on the lower side. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.

We then compared Smartsens Technology (Shanghai)'s net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 16% in the same 5-year period, which is a bit concerning.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Smartsens Technology (Shanghai) is trading on a high P/E or a low P/E, relative to its industry.

Is Smartsens Technology (Shanghai) Efficiently Re-investing Its Profits?

Smartsens Technology (Shanghai)'s very high three-year median payout ratio of 103% suggests that the company is paying its shareholders more than what it is earning and it definitely contributes to the low earnings growth seen by the company. This is indicative of risk. To know the 2 risks we have identified for Smartsens Technology (Shanghai) visit our risks dashboard for free.

Conclusion

On the whole, Smartsens Technology (Shanghai)'s performance is quite a big let-down. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.