China Telecom Corporation Limited (HKG:728) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

China Telecom (HKG:728) has had a rough month with its share price down 6.7%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study China Telecom'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

ROE 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 China Telecom is:

7.1% = CN¥33b ÷ CN¥465b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.07.

View our latest analysis for China Telecom

What Is The Relationship Between ROE And 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of China Telecom's Earnings Growth And 7.1% ROE

At first glance, China Telecom's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 5.8% doesn't go unnoticed by us. This probably goes some way in explaining China Telecom's moderate 10.0% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

We then compared China Telecom's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 1.6% in the same 5-year period.

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 China Telecom's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is China Telecom Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 70% (or a retention ratio of 30%) for China Telecom suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, China Telecom has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 78%. Accordingly, forecasts suggest that China Telecom's future ROE will be 8.5% which is again, similar to the current ROE.

Conclusion

In total, it does look like China Telecom has some positive aspects to its business. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.