Will Weakness in XDC Industries (Shenzhen) Limited's (SZSE:300615) Stock Prove Temporary Given Strong Fundamentals?

XDC Industries (Shenzhen) (SZSE:300615) has had a rough three months with its share price down 19%. 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. Specifically, we decided to study XDC Industries (Shenzhen)'s ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for XDC Industries (Shenzhen)

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 XDC Industries (Shenzhen) is:

13% = CN¥72m ÷ CN¥540m (Based on the trailing twelve months to December 2023).

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¥0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

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

A Side By Side comparison of XDC Industries (Shenzhen)'s Earnings Growth And 13% ROE

To begin with, XDC Industries (Shenzhen) seems to have a respectable ROE. Especially when compared to the industry average of 6.7% the company's ROE looks pretty impressive. This probably laid the ground for XDC Industries (Shenzhen)'s significant 44% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that XDC Industries (Shenzhen)'s growth is quite high when compared to the industry average growth of 11% 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). This then helps them determine if the stock is placed for a bright or bleak future. Is XDC Industries (Shenzhen) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is XDC Industries (Shenzhen) Efficiently Re-investing Its Profits?

XDC Industries (Shenzhen) has a significant three-year median payout ratio of 76%, meaning the company only retains 24% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Besides, XDC Industries (Shenzhen) has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with XDC Industries (Shenzhen)'s performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into XDC Industries (Shenzhen)'s past profit growth, check out this visualization of past earnings, revenue and cash flows.

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.