Most readers would already be aware that Innuovo Technology's (SZSE:000795) stock increased significantly by 17% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Innuovo 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Innuovo Technology
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 Innuovo Technology is:
6.7% = CN¥178m ÷ CN¥2.7b (Based on the trailing twelve months to June 2024).
The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.07 in profit.
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 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.
When you first look at it, Innuovo Technology's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 7.7%, so we won't completely dismiss the company. On the other hand, Innuovo Technology reported a fairly low 4.1% net income growth over the past five years. Bear in mind, the company's ROE is not very high . Hence, this does provide some context to low earnings growth seen by the company.
We then compared Innuovo Technology's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 10% in the same 5-year period, which is a bit concerning.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Innuovo Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Despite having a normal three-year median payout ratio of 35% (or a retention ratio of 65% over the past three years, Innuovo Technology has seen very little growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Additionally, Innuovo Technology started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth.
Overall, we have mixed feelings about Innuovo Technology. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth.
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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.