Does Shenzhen Ysstech Info-Tech Co.,Ltd's (SZSE:300377) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Shenzhen Ysstech Info-TechLtd (SZSE:300377) has had a great run on the share market with its stock up by a significant 22% over the last three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to Shenzhen Ysstech Info-TechLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Shenzhen Ysstech Info-TechLtd

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 Ysstech Info-TechLtd is:

2.2% = CN¥65m ÷ CN¥2.9b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.02 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. 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.

Shenzhen Ysstech Info-TechLtd's Earnings Growth And 2.2% ROE

It is hard to argue that Shenzhen Ysstech Info-TechLtd's ROE is much good in and of itself. Even compared to the average industry ROE of 4.5%, the company's ROE is quite dismal. For this reason, Shenzhen Ysstech Info-TechLtd's five year net income decline of 23% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared Shenzhen Ysstech Info-TechLtd's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 0.8% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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 Shenzhen Ysstech Info-TechLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shenzhen Ysstech Info-TechLtd Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 101% (implying that -0.5% of the profits are retained), most of Shenzhen Ysstech Info-TechLtd's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 3 risks we have identified for Shenzhen Ysstech Info-TechLtd visit our risks dashboard for free.

In addition, Shenzhen Ysstech Info-TechLtd has been paying dividends over a period of at least ten 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

In total, we would have a hard think before deciding on any investment action concerning Shenzhen Ysstech Info-TechLtd. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Shenzhen Ysstech Info-TechLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.