Can Mixed Fundamentals Have A Negative Impact on Hangzhou DPtech Technologies Co.,Ltd. (SZSE:300768) Current Share Price Momentum?

Hangzhou DPtech TechnologiesLtd's (SZSE:300768) stock is up by a considerable 13% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Hangzhou DPtech TechnologiesLtd's ROE in this article.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Hangzhou DPtech TechnologiesLtd

How Do You 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 Hangzhou DPtech TechnologiesLtd is:

4.1% = CN¥131m ÷ CN¥3.2b (Based on the trailing twelve months to March 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¥0.04 in profit.

Why Is ROE Important For 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.

A Side By Side comparison of Hangzhou DPtech TechnologiesLtd's Earnings Growth And 4.1% ROE

It is quite clear that Hangzhou DPtech TechnologiesLtd's ROE is rather low. An industry comparison shows that the company's ROE is not much different from the industry average of 4.2% either. Given the low ROE Hangzhou DPtech TechnologiesLtd's five year net income decline of 10% is not surprising.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 2.8% in the same 5-year period, we still found Hangzhou DPtech TechnologiesLtd's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Hangzhou DPtech TechnologiesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hangzhou DPtech TechnologiesLtd Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 34% (that is, a retention ratio of 66%), the fact that Hangzhou DPtech TechnologiesLtd's earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Hangzhou DPtech TechnologiesLtd has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Conclusion

Overall, we have mixed feelings about Hangzhou DPtech TechnologiesLtd. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.