Hangzhou DPtech Technologies Co.,Ltd. (SZSE:300768) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Most readers would already be aware that Hangzhou DPtech TechnologiesLtd's (SZSE:300768) stock increased significantly by 58% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Hangzhou DPtech TechnologiesLtd's ROE in this article.

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.

Check out our latest analysis for Hangzhou DPtech TechnologiesLtd

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hangzhou DPtech TechnologiesLtd is:

4.4% = CN¥139m ÷ CN¥3.2b (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¥0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Hangzhou DPtech TechnologiesLtd's Earnings Growth And 4.4% ROE

As you can see, Hangzhou DPtech TechnologiesLtd's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 4.5% either. Therefore, it might not be wrong to say that the five year net income decline of 13% seen by Hangzhou DPtech TechnologiesLtd was possibly a result of the disappointing ROE.

That being said, we compared Hangzhou DPtech TechnologiesLtd'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 an important metric to consider when valuing a stock. 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 Hangzhou DPtech TechnologiesLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hangzhou DPtech TechnologiesLtd Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 34% (where it is retaining 66% of its profits), Hangzhou DPtech TechnologiesLtd has seen a decline in earnings as we saw above. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Moreover, Hangzhou DPtech TechnologiesLtd has been paying dividends for five 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.

Summary

Overall, we have mixed feelings about Hangzhou DPtech TechnologiesLtd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.