Do Its Financials Have Any Role To Play In Driving ShenZhen Click Technology Co.,LTD.'s (SZSE:002782) Stock Up Recently?

Simply Wall St · 11/25 22:15

Most readers would already be aware that ShenZhen Click TechnologyLTD's (SZSE:002782) stock increased significantly by 31% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study ShenZhen Click TechnologyLTD'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 ShenZhen Click TechnologyLTD

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 ShenZhen Click TechnologyLTD is:

6.9% = CN¥134m ÷ CN¥1.9b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.07 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

ShenZhen Click TechnologyLTD's Earnings Growth And 6.9% ROE

At first glance, ShenZhen Click TechnologyLTD's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.4%. On the other hand, ShenZhen Click TechnologyLTD reported a moderate 7.4% net income growth over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that ShenZhen Click TechnologyLTD's reported growth was lower than the industry growth of 10% over the last few years, which is not something we like to see.

past-earnings-growth
SZSE:002782 Past Earnings Growth November 25th 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. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if ShenZhen Click TechnologyLTD is trading on a high P/E or a low P/E, relative to its industry.

Is ShenZhen Click TechnologyLTD Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 34% (implying that the company retains 66% of its profits), it seems that ShenZhen Click TechnologyLTD is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, ShenZhen Click TechnologyLTD is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.

Summary

On the whole, we do feel that ShenZhen Click TechnologyLTD has some positive attributes. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.