UCAP Cloud Information Technology Co.,Ltd.'s (SHSE:688228) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

UCAP Cloud Information TechnologyLtd (SHSE:688228) has had a great run on the share market with its stock up by a significant 52% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study UCAP Cloud Information TechnologyLtd's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for UCAP Cloud Information TechnologyLtd

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 UCAP Cloud Information TechnologyLtd is:

4.2% = CN¥58m ÷ CN¥1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the profit 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¥0.04 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.

UCAP Cloud Information TechnologyLtd's Earnings Growth And 4.2% ROE

It is quite clear that UCAP Cloud Information TechnologyLtd's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 4.6%. Therefore, it might not be wrong to say that the five year net income decline of 8.0% seen by UCAP Cloud Information TechnologyLtd was possibly a result of the disappointing ROE.

So, as a next step, we compared UCAP Cloud Information TechnologyLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 2.5% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about UCAP Cloud Information TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is UCAP Cloud Information TechnologyLtd Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 31% (that is, a retention ratio of 69%), the fact that UCAP Cloud Information TechnologyLtd's earnings have shrunk is quite puzzling. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, UCAP Cloud Information TechnologyLtd has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

In total, we're a bit ambivalent about UCAP Cloud Information TechnologyLtd's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its 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. You can see the 3 risks we have identified for UCAP Cloud Information TechnologyLtd by visiting our risks dashboard for free on our platform here.

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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.