Are Chengdu Information Technology of Chinese Academy of Sciences Co.,Ltd's (SZSE:300678) Mixed Financials Driving The Negative Sentiment?

Chengdu Information Technology of Chinese Academy of SciencesLtd (SZSE:300678) has had a rough three months with its share price down 18%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Chengdu Information Technology of Chinese Academy of SciencesLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out 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:

4.4% = CN¥39m ÷ CN¥871m (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 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. 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.

Chengdu Information Technology of Chinese Academy of SciencesLtd's Earnings Growth And 4.4% ROE

It is hard to argue that Chengdu Information Technology of Chinese Academy of SciencesLtd's ROE is much good in and of itself. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 5.2%. The flat earnings by Chengdu Information Technology of Chinese Academy of SciencesLtd over the past five years could probably be the result of it having a lower ROE.

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 3.7% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Chengdu Information Technology of Chinese Academy of SciencesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

Chengdu Information Technology of Chinese Academy of SciencesLtd has a low three-year median payout ratio of 20% (or a retention ratio of 80%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

Moreover, Chengdu Information Technology of Chinese Academy of SciencesLtd has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

Overall, we have mixed feelings about Chengdu Information Technology of Chinese Academy of SciencesLtd. 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. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Chengdu Information Technology of Chinese Academy of SciencesLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com