Are Strong Financial Prospects The Force That Is Driving The Momentum In Shenzhen Fortune Trend Technology Co., Ltd.'s SHSE:688318) Stock?

Shenzhen Fortune Trend Technology's (SHSE:688318) stock is up by a considerable 14% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Shenzhen Fortune Trend Technology's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Shenzhen Fortune Trend Technology

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Shenzhen Fortune Trend Technology is:

7.4% = CN¥256m ÷ CN¥3.5b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Shenzhen Fortune Trend Technology's Earnings Growth And 7.4% ROE

On the face of it, Shenzhen Fortune Trend Technology's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 4.5% doesn't go unnoticed by us. Yet, Shenzhen Fortune Trend Technology has posted measly growth of 4.6% over the past five years. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. So that could be one of the factors that are causing earnings growth to stay low.

Next, on comparing with the industry net income growth, we found that Shenzhen Fortune Trend Technology's growth is quite high when compared to the industry average growth of 1.1% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Shenzhen Fortune Trend Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Shenzhen Fortune Trend Technology Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 34% (or a retention ratio of 66% over the past three years, Shenzhen Fortune Trend Technology has seen very little growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Shenzhen Fortune Trend Technology has been paying dividends over a period of four years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we feel that Shenzhen Fortune Trend Technology's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 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.