Most readers would already be aware that iSoftStone Information Technology (Group)'s (SZSE:301236) stock increased significantly by 60% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study iSoftStone Information Technology (Group)'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for iSoftStone Information Technology (Group)
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 iSoftStone Information Technology (Group) is:
5.8% = CN¥607m ÷ CN¥10b (Based on the trailing twelve months to September 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¥0.06.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
iSoftStone Information Technology (Group)'s Earnings Growth And 5.8% ROE
At first glance, iSoftStone Information Technology (Group)'s ROE doesn't look very promising. However, its ROE is similar to the industry average of 5.8%, so we won't completely dismiss the company. Even so, iSoftStone Information Technology (Group) has shown a fairly decent growth in its net income which grew at a rate of 7.0%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this 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.
We then performed a comparison between iSoftStone Information Technology (Group)'s net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 7.0% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. 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 iSoftStone Information Technology (Group) fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is iSoftStone Information Technology (Group) Efficiently Re-investing Its Profits?
While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.
Summary
Overall, we feel that iSoftStone Information Technology (Group) certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.