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Will Weakness in Shenzhen Transsion Holdings Co., Ltd.'s (SHSE:688036) Stock Prove Temporary Given Strong Fundamentals?
With its stock down 14% over the past three months, it is easy to disregard Shenzhen Transsion Holdings (SHSE:688036). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Shenzhen Transsion Holdings' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Shenzhen Transsion Holdings
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 Shenzhen Transsion Holdings is:
27% = CN¥5.6b ÷ CN¥20b (Based on the trailing twelve months to September 2024).
The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.27 in profit.
What Has ROE Got To Do With 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 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.
Shenzhen Transsion Holdings' Earnings Growth And 27% ROE
Firstly, we acknowledge that Shenzhen Transsion Holdings has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 6.9% which is quite remarkable. So, the substantial 22% net income growth seen by Shenzhen Transsion Holdings over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Shenzhen Transsion Holdings' growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 688036? You can find out in our latest intrinsic value infographic research report.
Is Shenzhen Transsion Holdings Using Its Retained Earnings Effectively?
Shenzhen Transsion Holdings' significant three-year median payout ratio of 58% (where it is retaining only 42% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.
Moreover, Shenzhen Transsion Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.
Conclusion
On the whole, we feel that Shenzhen Transsion Holdings' performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
About SHSE:688036
Shenzhen Transsion Holdings
Manufactures and sells smart devices in Africa and internationally.
Outstanding track record and undervalued.