Tianjin Troila Information Technology Co.,Ltd.'s (SHSE:600225) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Simply Wall St · Nov 25, 2023 09:49

It is hard to get excited after looking at Tianjin Troila Information TechnologyLtd's (SHSE:600225) recent performance, when its stock has declined 15% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Tianjin Troila Information TechnologyLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Tianjin Troila Information TechnologyLtd

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Tianjin Troila Information TechnologyLtd is:

16% = CN¥411m ÷ CN¥2.6b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.16 in profit.

What Is The Relationship Between ROE And 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. 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.

Tianjin Troila Information TechnologyLtd's Earnings Growth And 16% ROE

At first glance, Tianjin Troila Information TechnologyLtd seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 5.5%. This certainly adds some context to Tianjin Troila Information TechnologyLtd's exceptional 22% net income growth seen over the past five years. However, there could also be other causes behind 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.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Tianjin Troila Information TechnologyLtd compares quite favourably to the industry average, which shows a decline of 4.2% over the last few years.

past-earnings-growth — SHSE:600225 Past Earnings Growth November 25th 2023

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 Tianjin Troila Information TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tianjin Troila Information TechnologyLtd Using Its Retained Earnings Effectively?

Tianjin Troila Information TechnologyLtd doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, we are pretty happy with Tianjin Troila Information TechnologyLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 3 risks we have identified for Tianjin Troila Information TechnologyLtd visit our risks dashboard for free.

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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.