Shenzhen Phoenix Telecom Technology Co.,Ltd.'s (SZSE:301191) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 7.4% over the past week, it is easy to disregard Shenzhen Phoenix Telecom TechnologyLtd (SZSE:301191). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Shenzhen Phoenix Telecom TechnologyLtd'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.

Check out our latest analysis for Shenzhen Phoenix Telecom TechnologyLtd

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 Shenzhen Phoenix Telecom TechnologyLtd is:

7.4% = CN¥126m ÷ CN¥1.7b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.07 in profit.

What Is The Relationship Between ROE And 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 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 Phoenix Telecom TechnologyLtd's Earnings Growth And 7.4% ROE

When you first look at it, Shenzhen Phoenix Telecom TechnologyLtd's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 5.6% which we definitely can't overlook. Consequently, this likely laid the ground for the decent growth of 6.1% seen over the past five years by Shenzhen Phoenix Telecom TechnologyLtd. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

We then compared Shenzhen Phoenix Telecom TechnologyLtd'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.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Shenzhen Phoenix Telecom TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shenzhen Phoenix Telecom TechnologyLtd Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 41% (implying that the company retains 59% of its profits), it seems that Shenzhen Phoenix Telecom TechnologyLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

While Shenzhen Phoenix Telecom TechnologyLtd has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

In total, it does look like Shenzhen Phoenix Telecom TechnologyLtd has some positive aspects to its business. In particular, it's great to see that the company is investing heavily into its business and along with a moderate rate of return, that has resulted in a respectable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.