Stock Analysis

Declining Stock and Solid Fundamentals: Is The Market Wrong About Shandong Cvicse Middleware Co.,Ltd. (SHSE:688695)?

SHSE:688695
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Shandong Cvicse MiddlewareLtd (SHSE:688695) has had a rough month with its share price down 13%. 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 Shandong Cvicse MiddlewareLtd's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Shandong Cvicse MiddlewareLtd

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 Shandong Cvicse MiddlewareLtd is:

8.5% = CN¥66m ÷ CN¥782m (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Shandong Cvicse MiddlewareLtd's Earnings Growth And 8.5% ROE

On the face of it, Shandong Cvicse MiddlewareLtd's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 4.5%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 14% seen over the past five years by Shandong Cvicse MiddlewareLtd. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

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

past-earnings-growth
SHSE:688695 Past Earnings Growth January 1st 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Shandong Cvicse MiddlewareLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shandong Cvicse MiddlewareLtd Efficiently Re-investing Its Profits?

Shandong Cvicse MiddlewareLtd's three-year median payout ratio to shareholders is 25% (implying that it retains 75% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Conclusion

In total, we are pretty happy with Shandong Cvicse MiddlewareLtd's performance. 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. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 3 risks we have identified for Shandong Cvicse MiddlewareLtd.

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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.