Declining Stock and Solid Fundamentals: Is The Market Wrong About Joy Spreader Interactive Technology Co.,Ltd (HKG:6988)?

It is hard to get excited after looking at Joy Spreader Interactive TechnologyLtd's (HKG:6988) recent performance, when its stock has declined 14% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Joy Spreader Interactive TechnologyLtd's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Joy Spreader Interactive TechnologyLtd

How To Calculate Return On Equity?

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 Joy Spreader Interactive TechnologyLtd is:

22% = CN¥101m ÷ CN¥464m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.22 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.

Joy Spreader Interactive TechnologyLtd's Earnings Growth And 22% ROE

First thing first, we like that Joy Spreader Interactive TechnologyLtd has an impressive ROE. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. As a result, Joy Spreader Interactive TechnologyLtd's exceptional 51% net income growth seen over the past five years, doesn't come as a surprise.

Given that the industry shrunk its earnings at a rate of 4.6% in the same period, the net income growth of the company is quite impressive.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Joy Spreader Interactive TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Joy Spreader Interactive TechnologyLtd Using Its Retained Earnings Effectively?

Summary

Overall, we are quite pleased with Joy Spreader Interactive TechnologyLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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. 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.
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