Fengzhushou Co., Ltd.'s (SZSE:301382) Stock Been Rising: Are Strong Financials Guiding The Market?
Fengzhushou's (SZSE:301382) stock up by 7.6% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Fengzhushou's ROE today.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Fengzhushou
How Is ROE Calculated?
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 Fengzhushou is:
7.8% = CN¥144m ÷ CN¥1.8b (Based on the trailing twelve months to September 2024).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.08 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.
Fengzhushou's Earnings Growth And 7.8% ROE
When you first look at it, Fengzhushou's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 4.6% which we definitely can't overlook. Consequently, this likely laid the ground for the decent growth of 15% seen over the past five years by Fengzhushou. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
Next, on comparing with the industry net income growth, we found that Fengzhushou's growth is quite high when compared to the industry average growth of 2.5% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Fengzhushou is trading on a high P/E or a low P/E, relative to its industry.
Is Fengzhushou Efficiently Re-investing Its Profits?
Fengzhushou's three-year median payout ratio to shareholders is 17% (implying that it retains 83% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
While Fengzhushou has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.
Conclusion
Overall, we are quite pleased with Fengzhushou's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 2 risks we have identified for Fengzhushou 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.
About SZSE:301382
Fengzhushou
Provides mobile assistant services and sells hardware in China.
Adequate balance sheet and slightly overvalued.