With its stock down 17% over the past three months, it is easy to disregard Inmyshow Digital Technology(Group)Co.Ltd (SHSE:600556). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Inmyshow Digital Technology(Group)Co.Ltd's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Is ROE Calculated?
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 Inmyshow Digital Technology(Group)Co.Ltd is:
2.0% = CN¥76m ÷ CN¥3.8b (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¥0.02.
Why Is ROE Important For 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. 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.
Inmyshow Digital Technology(Group)Co.Ltd's Earnings Growth And 2.0% ROE
It is quite clear that Inmyshow Digital Technology(Group)Co.Ltd's ROE is rather low. Even compared to the average industry ROE of 6.1%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 10% seen by Inmyshow Digital Technology(Group)Co.Ltd was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
However, when we compared Inmyshow Digital Technology(Group)Co.Ltd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 2.2% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 600556 fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Inmyshow Digital Technology(Group)Co.Ltd Using Its Retained Earnings Effectively?
Inmyshow Digital Technology(Group)Co.Ltd's low three-year median payout ratio of 10.0% (implying that it retains the remaining 90% of its profits) comes as a surprise when you pair it with the shrinking earnings. This typically shouldn't be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.
Additionally, Inmyshow Digital Technology(Group)Co.Ltd has paid dividends over a period of four years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.
Summary
Overall, we have mixed feelings about Inmyshow Digital Technology(Group)Co.Ltd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.