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Declining Stock and Decent Financials: Is The Market Wrong About COFCO Engineering & Technology Co., Ltd. (SZSE:301058)?

Simply Wall St ·  {{timeTz}}

COFCO Engineering & Technology (SZSE:301058) has had a rough three months with its share price down 9.2%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study COFCO Engineering & 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for COFCO Engineering & Technology

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for COFCO Engineering & Technology is:

8.8% = CN¥171m ÷ CN¥1.9b (Based on the trailing twelve months to March 2022).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.09.

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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of COFCO Engineering & Technology's Earnings Growth And 8.8% ROE

At first glance, COFCO Engineering & Technology's ROE doesn't look very promising. However, its ROE is similar to the industry average of 8.0%, so we won't completely dismiss the company. Looking at COFCO Engineering & Technology's exceptional 29% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's 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.

As a next step, we compared COFCO Engineering & Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

past-earnings-growthSZSE:301058 Past Earnings Growth August 23rd 2022

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is COFCO Engineering & Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is COFCO Engineering & Technology Making Efficient Use Of Its Profits?

COFCO Engineering & Technology has a three-year median payout ratio of 40% (where it is retaining 60% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like COFCO Engineering & Technology is reinvesting its earnings efficiently.

Summary

On the whole, we do feel that COFCO Engineering & Technology has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

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