Is Weakness In Eoptolink Technology Inc., Ltd. (SZSE:300502) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 16% over the past three months, it is easy to disregard Eoptolink Technology (SZSE:300502). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Eoptolink Technology's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Eoptolink Technology is:

27% = CN¥1.9b ÷ CN¥7.1b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.27 in profit.

View our latest analysis for Eoptolink Technology

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Eoptolink Technology's Earnings Growth And 27% ROE

First thing first, we like that Eoptolink Technology has an impressive ROE. Secondly, even when compared to the industry average of 6.0% the company's ROE is quite impressive. Under the circumstances, Eoptolink Technology's considerable five year net income growth of 30% was to be expected.

Next, on comparing with the industry net income growth, we found that Eoptolink Technology's growth is quite high when compared to the industry average growth of 3.6% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Eoptolink Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Eoptolink Technology Using Its Retained Earnings Effectively?

Eoptolink Technology's ' three-year median payout ratio is on the lower side at 8.6% implying that it is retaining a higher percentage (91%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Additionally, Eoptolink Technology has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 13% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

On the whole, we feel that Eoptolink Technology's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.