Could The Market Be Wrong About Shenzhen Fortune Trend technology Co., Ltd. (SHSE:688318) Given Its Attractive Financial Prospects?

With its stock down 11% over the past week, it is easy to disregard Shenzhen Fortune Trend technology (SHSE:688318). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Shenzhen Fortune Trend technology's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Shenzhen Fortune Trend technology

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 Shenzhen Fortune Trend technology is:

8.7% = CN¥305m ÷ CN¥3.5b (Based on the trailing twelve months to March 2024).

The 'return' is the profit 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¥0.09.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Shenzhen Fortune Trend technology's Earnings Growth And 8.7% ROE

At first glance, Shenzhen Fortune Trend technology's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 4.2%, is definitely interesting. Yet, Shenzhen Fortune Trend technology has posted measly growth of 4.1% 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. Therefore, the low growth in earnings could also be the result of this.

Given that the industry shrunk its earnings at a rate of 3.2% over the last few years, the net income growth of the company is quite impressive.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 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 Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 33% (or a retention ratio of 67% over the past three years, Shenzhen Fortune Trend technology has seen very little growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Shenzhen Fortune Trend technology has paid dividends over a period of four years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we are pretty happy with Shenzhen Fortune Trend technology's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. 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 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.