Fujian Apex Software Co.,LTD (SHSE:603383) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

It is hard to get excited after looking at Fujian Apex SoftwareLTD's (SHSE:603383) recent performance, when its stock has declined 25% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Fujian Apex SoftwareLTD'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Fujian Apex SoftwareLTD

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Fujian Apex SoftwareLTD is:

15% = CN¥228m ÷ CN¥1.5b (Based on the trailing twelve months to March 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¥0.15 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. 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 Fujian Apex SoftwareLTD's Earnings Growth And 15% ROE

To begin with, Fujian Apex SoftwareLTD seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 4.2%. This certainly adds some context to Fujian Apex SoftwareLTD's decent 14% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Fujian Apex SoftwareLTD compares quite favourably to the industry average, which shows a decline of 3.2% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is 603383 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Fujian Apex SoftwareLTD Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 68% (or a retention ratio of 32%) for Fujian Apex SoftwareLTD suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Fujian Apex SoftwareLTD has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 61%. Still, forecasts suggest that Fujian Apex SoftwareLTD's future ROE will rise to 19% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that Fujian Apex SoftwareLTD's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.