Are Strong Financial Prospects The Force That Is Driving The Momentum In Shanghai Longcheer Technology Co., Ltd.'s SHSE:603341) Stock?

Simply Wall St · 09/29 02:26

Shanghai Longcheer Technology's (SHSE:603341) stock is up by a considerable 8.7% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Shanghai Longcheer Technology's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Shanghai Longcheer Technology

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 Shanghai Longcheer Technology is:

11% = CN¥604m ÷ CN¥5.4b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.11 in profit.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of Shanghai Longcheer Technology's Earnings Growth And 11% ROE

At first glance, Shanghai Longcheer Technology seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.5%. This probably laid the ground for Shanghai Longcheer Technology's moderate 15% net income growth seen over the past five years.

As a next step, we compared Shanghai Longcheer Technology's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 13% in the same period.

past-earnings-growth
SHSE:603341 Past Earnings Growth September 29th 2024

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Shanghai Longcheer Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai Longcheer Technology Using Its Retained Earnings Effectively?

Shanghai Longcheer Technology has a healthy combination of a moderate three-year median payout ratio of 32% (or a retention ratio of 68%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Conclusion

Overall, we are quite pleased with Shanghai Longcheer Technology'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. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 4 risks we have identified for Shanghai Longcheer Technology by visiting our risks dashboard for free on our platform here.