Kale Environmental Technology (Shanghai)'s (SZSE:301070) stock is up by a considerable 32% over the past month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Kale Environmental Technology (Shanghai)'s ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Kale Environmental Technology (Shanghai)
How Do You Calculate Return On Equity?
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 Kale Environmental Technology (Shanghai) is:
6.0% = CN¥47m ÷ CN¥786m (Based on the trailing twelve months to March 2022).
The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Kale Environmental Technology (Shanghai)'s Earnings Growth And 6.0% ROE
On the face of it, Kale Environmental Technology (Shanghai)'s ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 8.2%. As a result, Kale Environmental Technology (Shanghai)'s flat net income growth over the past five years doesn't come as a surprise given its lower ROE.
As a next step, we compared Kale Environmental Technology (Shanghai)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same period.SZSE:301070 Past Earnings Growth June 15th 2022
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Kale Environmental Technology (Shanghai) is trading on a high P/E or a low P/E, relative to its industry.
Is Kale Environmental Technology (Shanghai) Making Efficient Use Of Its Profits?
Despite having a normal three-year median payout ratio of 49% (implying that the company keeps 51% of its income) over the last three years, Kale Environmental Technology (Shanghai) has seen a negligible amount of 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.
Overall, we have mixed feelings about Kale Environmental Technology (Shanghai). While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Kale Environmental Technology (Shanghai)'s past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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.