Are Chengdu Information Technology of Chinese Academy of Sciences Co.,Ltd's (SZSE:300678) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

Chengdu Information Technology of Chinese Academy of SciencesLtd (SZSE:300678) has had a rough week with its share price down 13%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Chengdu Information Technology of Chinese Academy of SciencesLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Chengdu Information Technology of Chinese Academy of SciencesLtd

How To Calculate Return On Equity?

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 Chengdu Information Technology of Chinese Academy of SciencesLtd is:

4.8% = CN¥41m ÷ CN¥850m (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

What Is The Relationship Between ROE And 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 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.

Chengdu Information Technology of Chinese Academy of SciencesLtd's Earnings Growth And 4.8% ROE

As you can see, Chengdu Information Technology of Chinese Academy of SciencesLtd's ROE looks pretty weak. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 5.2%. Thus, the low ROE certainly provides some context to Chengdu Information Technology of Chinese Academy of SciencesLtd's very little net income growth of 2.3% seen over the past five years.

Next, on comparing with the industry net income growth, we found that Chengdu Information Technology of Chinese Academy of SciencesLtd's reported growth was lower than the industry growth of 6.6% over the last few years, which is not something we like to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Chengdu Information Technology of Chinese Academy of SciencesLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Chengdu Information Technology of Chinese Academy of SciencesLtd Using Its Retained Earnings Effectively?

A low three-year median payout ratio of 19% (implying that the company retains the remaining 81% of its income) suggests that Chengdu Information Technology of Chinese Academy of SciencesLtd is retaining most of its profits. However, the low earnings growth number doesn't reflect this fact. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Chengdu Information Technology of Chinese Academy of SciencesLtd has been paying dividends over a period of six 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're a bit ambivalent about Chengdu Information Technology of Chinese Academy of SciencesLtd's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the 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. To know the 1 risk we have identified for Chengdu Information Technology of Chinese Academy of SciencesLtd visit our risks dashboard for free.

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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.