Is Qingdao Kutesmart Co.,Ltd.'s (SZSE:300840) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Qingdao KutesmartLtd's (SZSE:300840) stock increased significantly by 19% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Qingdao KutesmartLtd'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Qingdao KutesmartLtd

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 Qingdao KutesmartLtd is:

9.8% = CN¥122m ÷ CN¥1.3b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.10 in profit.

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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Qingdao KutesmartLtd's Earnings Growth And 9.8% ROE

On the face of it, Qingdao KutesmartLtd's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 7.8% which we definitely can't overlook. Consequently, this likely laid the ground for the decent growth of 19% seen over the past five years by Qingdao KutesmartLtd. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Qingdao KutesmartLtd'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 1.7%.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Qingdao KutesmartLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Qingdao KutesmartLtd Using Its Retained Earnings Effectively?

Qingdao KutesmartLtd has a low three-year median payout ratio of 9.6%, meaning that the company retains the remaining 90% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Qingdao KutesmartLtd has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Qingdao KutesmartLtd's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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. You can see the 1 risk we have identified for Qingdao KutesmartLtd by visiting our risks dashboard for free on our platform here.

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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.