Has SMARTGEN (Zhengzhou) Technology Co., Ltd.'s (SZSE:301361) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that SMARTGEN (Zhengzhou) Technology's (SZSE:301361) stock increased significantly by 13% over the past week. 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 SMARTGEN (Zhengzhou) 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for SMARTGEN (Zhengzhou) Technology

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 SMARTGEN (Zhengzhou) Technology is:

6.3% = CN¥71m ÷ CN¥1.1b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.06 in profit.

Why Is ROE Important For 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. 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 SMARTGEN (Zhengzhou) Technology's Earnings Growth And 6.3% ROE

At first glance, SMARTGEN (Zhengzhou) Technology's ROE doesn't look very promising. However, its ROE is similar to the industry average of 6.3%, so we won't completely dismiss the company. Having said that, SMARTGEN (Zhengzhou) Technology has shown a modest net income growth of 5.9% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared SMARTGEN (Zhengzhou) Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 3.9%.

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. If you're wondering about SMARTGEN (Zhengzhou) Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is SMARTGEN (Zhengzhou) Technology Efficiently Re-investing Its Profits?

SMARTGEN (Zhengzhou) Technology has a low three-year median payout ratio of 9.4%, meaning that the company retains the remaining 91% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Along with seeing a growth in earnings, SMARTGEN (Zhengzhou) Technology only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

In total, it does look like SMARTGEN (Zhengzhou) Technology has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings.

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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.