Do Its Financials Have Any Role To Play In Driving Shenzhen Hui Chuang Da Technology Co., Ltd.'s (SZSE:300909) Stock Up Recently?

Shenzhen Hui Chuang Da Technology's (SZSE:300909) stock is up by a considerable 11% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Shenzhen Hui Chuang Da Technology's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To 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 Hui Chuang Da Technology is:

5.6% = CN¥110m ÷ CN¥2.0b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.06 in profit.

See our latest analysis for Shenzhen Hui Chuang Da Technology

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Shenzhen Hui Chuang Da Technology's Earnings Growth And 5.6% ROE

When you first look at it, Shenzhen Hui Chuang Da Technology's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 6.0%, so we won't completely dismiss the company. On the other hand, Shenzhen Hui Chuang Da Technology reported a fairly low 3.9% net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.

We then performed a comparison between Shenzhen Hui Chuang Da Technology's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 3.9% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 Shenzhen Hui Chuang Da Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Shenzhen Hui Chuang Da Technology Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 30% (implying that the company retains the remaining 70% of its income), Shenzhen Hui Chuang Da Technology's earnings growth was quite low. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Shenzhen Hui Chuang Da Technology has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, we do feel that Shenzhen Hui Chuang Da Technology has some positive attributes. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Shenzhen Hui Chuang Da Technology.

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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.