Can Mixed Fundamentals Have A Negative Impact on Shenzhen Easttop Supply Chain Management Co., Ltd. (SZSE:002889) Current Share Price Momentum?

Shenzhen Easttop Supply Chain Management's (SZSE:002889) stock is up by a considerable 32% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Shenzhen Easttop Supply Chain Management'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Shenzhen Easttop Supply Chain Management

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 Shenzhen Easttop Supply Chain Management is:

7.8% = CN¥192m ÷ CN¥2.5b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

What Has ROE Got To Do With Earnings Growth?

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

Shenzhen Easttop Supply Chain Management's Earnings Growth And 7.8% ROE

When you first look at it, Shenzhen Easttop Supply Chain Management's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 8.3%, so we won't completely dismiss the company. Still, Shenzhen Easttop Supply Chain Management has seen a flat net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.

As a next step, we compared Shenzhen Easttop Supply Chain Management's net income growth with the industry and discovered that the industry saw an average growth of 7.8% in the same period.

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. 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 Easttop Supply Chain Management is trading on a high P/E or a low P/E, relative to its industry.

Is Shenzhen Easttop Supply Chain Management Making Efficient Use Of Its Profits?

Shenzhen Easttop Supply Chain Management has a low three-year median payout ratio of 10% (or a retention ratio of 90%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Shenzhen Easttop Supply Chain Management has been paying dividends over a period of five years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, we're a bit ambivalent about Shenzhen Easttop Supply Chain Management's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Shenzhen Easttop Supply Chain Management and see how it has performed in the past by looking at this FREE detailed graph 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.