Declining Stock and Solid Fundamentals: Is The Market Wrong About Shanghai Baosight Software Co.,Ltd. (SHSE:600845)?

Simply Wall St · May 9, 2023 23:12

It is hard to get excited after looking at Shanghai Baosight SoftwareLtd's (SHSE:600845) recent performance, when its stock has declined 12% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Shanghai Baosight SoftwareLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Shanghai Baosight SoftwareLtd

How To 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 Shanghai Baosight SoftwareLtd is:

20% = CN¥2.3b ÷ CN¥11b (Based on the trailing twelve months to March 2023).

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¥0.20.

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. 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. 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.

Shanghai Baosight SoftwareLtd's Earnings Growth And 20% ROE

At first glance, Shanghai Baosight SoftwareLtd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 5.4%. This probably laid the ground for Shanghai Baosight SoftwareLtd's significant 32% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Shanghai Baosight SoftwareLtd'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 9.4%.

past-earnings-growth — SHSE:600845 Past Earnings Growth May 10th 2023

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Shanghai Baosight SoftwareLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai Baosight SoftwareLtd Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 78% (implying that it keeps only 22% of profits) for Shanghai Baosight SoftwareLtd suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Shanghai Baosight SoftwareLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 34% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 26%, over the same period.

Conclusion

Overall, we are quite pleased with Shanghai Baosight SoftwareLtd's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.

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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.