CETC Digital Technology Co.,Ltd.'s (SHSE:600850) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Simply Wall St · Dec 6, 2023 01:23

CETC Digital TechnologyLtd (SHSE:600850) has had a rough month with its share price down 4.0%. 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 CETC Digital TechnologyLtd's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for CETC Digital TechnologyLtd

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 CETC Digital TechnologyLtd is:

12% = CN¥532m ÷ CN¥4.4b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.12 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

CETC Digital TechnologyLtd's Earnings Growth And 12% ROE

To begin with, CETC Digital TechnologyLtd seems to have a respectable ROE. Especially when compared to the industry average of 5.8% the company's ROE looks pretty impressive. Probably as a result of this, CETC Digital TechnologyLtd was able to see a decent growth of 12% over the last five years.

Next, on comparing with the industry net income growth, we found that CETC Digital TechnologyLtd's growth is quite high when compared to the industry average growth of 7.0% in the same period, which is great to see.

past-earnings-growth — SHSE:600850 Past Earnings Growth December 6th 2023

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is 600850 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is CETC Digital TechnologyLtd Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 39% (implying that the company retains 61% of its profits), it seems that CETC Digital TechnologyLtd is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, CETC Digital TechnologyLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with CETC Digital TechnologyLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.