Are Guangdong AVCiT Technology Holding Co., Ltd.'s (SZSE:001229) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 18% over the past month, it is easy to disregard Guangdong AVCiT Technology Holding (SZSE:001229). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study Guangdong AVCiT Technology Holding'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Guangdong AVCiT Technology Holding

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 Guangdong AVCiT Technology Holding is:

8.2% = CN¥79m ÷ CN¥965m (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Guangdong AVCiT Technology Holding's Earnings Growth And 8.2% ROE

At first glance, Guangdong AVCiT Technology Holding's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 5.6% doesn't go unnoticed by us. Yet, Guangdong AVCiT Technology Holding has posted measly growth of 3.1% over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay low.

We then compared Guangdong AVCiT Technology Holding's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Guangdong AVCiT Technology Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guangdong AVCiT Technology Holding Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 58% (or a retention ratio of 42%), most of Guangdong AVCiT Technology Holding's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Guangdong AVCiT Technology Holding started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.

Summary

On the whole, we feel that the performance shown by Guangdong AVCiT Technology Holding can be open to many interpretations. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 2 risks we have identified for Guangdong AVCiT Technology Holding by visiting our risks dashboard for free on our platform here.

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

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.