Declining Stock and Decent Financials: Is The Market Wrong About CETC Cyberspace Security Technology Co., Ltd. (SZSE:002268)?

Simply Wall St · 08/30 23:04

It is hard to get excited after looking at CETC Cyberspace Security Technology's (SZSE:002268) recent performance, when its stock has declined 22% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study CETC Cyberspace Security Technology's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for CETC Cyberspace Security Technology

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for CETC Cyberspace Security Technology is:

3.5% = CN¥188m ÷ CN¥5.3b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of CETC Cyberspace Security Technology's Earnings Growth And 3.5% ROE

As you can see, CETC Cyberspace Security Technology's ROE looks pretty weak. Even when compared to the industry average of 4.5%, the ROE figure is pretty disappointing. Despite this, surprisingly, CETC Cyberspace Security Technology saw an exceptional 20% net income growth over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared CETC Cyberspace Security 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 0.9%.

past-earnings-growth
SZSE:002268 Past Earnings Growth August 30th 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is CETC Cyberspace Security Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is CETC Cyberspace Security Technology Making Efficient Use Of Its Profits?

CETC Cyberspace Security Technology's three-year median payout ratio to shareholders is 15%, which is quite low. This implies that the company is retaining 85% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, CETC Cyberspace Security Technology is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we do feel that CETC Cyberspace Security Technology has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth.