Is China Technology Industry Group Limited's (HKG:8111) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that China Technology Industry Group's (HKG:8111) stock increased significantly by 38% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on China Technology Industry Group's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for China Technology Industry Group

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for China Technology Industry Group is:

58% = CN¥44m ÷ CN¥77m (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.58 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

China Technology Industry Group's Earnings Growth And 58% ROE

First thing first, we like that China Technology Industry Group has an impressive ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. Probably as a result of this, China Technology Industry Group was able to see a decent net income growth of 14% over the last five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by China Technology Industry Group compares quite favourably to the industry average, which shows a decline of 0.02% in the same period.

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. 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 China Technology Industry Group is trading on a high P/E or a low P/E, relative to its industry.

Is China Technology Industry Group Efficiently Re-investing Its Profits?

Summary

Overall, we are quite pleased with China Technology Industry Group's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 4 risks we have identified for China Technology Industry Group.

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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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