Is Zhuhai Kles Technologyco.,Ltd's (SZSE:301314) Stock On A Downtrend As A Result Of Its Poor Financials?

It is hard to get excited after looking at Zhuhai Kles Technologyco.Ltd's (SZSE:301314) recent performance, when its stock has declined 21% over the past month. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Zhuhai Kles Technologyco.Ltd'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Zhuhai Kles Technologyco.Ltd

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Zhuhai Kles Technologyco.Ltd is:

2.6% = CN¥29m ÷ CN¥1.1b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.03 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Zhuhai Kles Technologyco.Ltd's Earnings Growth And 2.6% ROE

It is quite clear that Zhuhai Kles Technologyco.Ltd's ROE is rather low. Not just that, even compared to the industry average of 6.3%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 13% seen by Zhuhai Kles Technologyco.Ltd over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Zhuhai Kles Technologyco.Ltd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 6.4% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Zhuhai Kles Technologyco.Ltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Zhuhai Kles Technologyco.Ltd Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 66% (implying that 34% of the profits are retained), most of Zhuhai Kles Technologyco.Ltd's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 4 risks we have identified for Zhuhai Kles Technologyco.Ltd by visiting our risks dashboard for free on our platform here.

In addition, Zhuhai Kles Technologyco.Ltd only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking.

Summary

On the whole, Zhuhai Kles Technologyco.Ltd's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. 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 Zhuhai Kles Technologyco.Ltd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.

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