Can Mixed Fundamentals Have A Negative Impact on Innuovo Technology Co., Ltd. (SZSE:000795) Current Share Price Momentum?

Simply Wall St · 10/15 22:38

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

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 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.

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 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.

Innuovo Technology's Earnings Growth And 6.7% ROE

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.

past-earnings-growth
SZSE:000795 Past Earnings Growth October 15th 2024

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.

Is Innuovo Technology Making Efficient Use Of Its Profits?

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.

Summary

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.