Could The Market Be Wrong About Bestlink Technologies Co.,Ltd. (SHSE:603206) Given Its Attractive Financial Prospects?

Bestlink TechnologiesLtd (SHSE:603206) has had a rough month with its share price down 10%. 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 Bestlink TechnologiesLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Bestlink TechnologiesLtd

How Is ROE Calculated?

Return on equity 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 Bestlink TechnologiesLtd is:

6.8% = CN¥150m ÷ CN¥2.2b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.07 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Bestlink TechnologiesLtd's Earnings Growth And 6.8% ROE

At first glance, Bestlink TechnologiesLtd's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 4.6% doesn't go unnoticed by us. Still, Bestlink TechnologiesLtd's net income growth of 4.4% over the past five years was mediocre at best. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Therefore, the low growth in earnings could also be the result of this.

As a next step, we compared Bestlink TechnologiesLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 2.5%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Bestlink TechnologiesLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Bestlink TechnologiesLtd Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 31% (implying that the company retains the remaining 69% of its income), Bestlink TechnologiesLtd's earnings growth was quite low. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Bestlink TechnologiesLtd started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Conclusion

On the whole, we feel that Bestlink TechnologiesLtd's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 3 risks we have identified for Bestlink TechnologiesLtd.

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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.