Most readers would already be aware that Dongfeng Electronic TechnologyLtd's (SHSE:600081) stock increased significantly by 7.1% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Dongfeng Electronic TechnologyLtd's ROE.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
Return on equity 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 Dongfeng Electronic TechnologyLtd is:
5.3% = CN¥289m ÷ CN¥5.5b (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 in profit.
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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Dongfeng Electronic TechnologyLtd's Earnings Growth And 5.3% ROE
On the face of it, Dongfeng Electronic TechnologyLtd's ROE is not much to talk about. Next, when compared to the average industry ROE of 7.5%, the company's ROE leaves us feeling even less enthusiastic. Therefore, Dongfeng Electronic TechnologyLtd's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
Next, on comparing with the industry net income growth, we found that Dongfeng Electronic TechnologyLtd's reported growth was lower than the industry growth of 3.8% over the last few years, which is not something we like to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Dongfeng Electronic TechnologyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Dongfeng Electronic TechnologyLtd Efficiently Re-investing Its Profits?
Despite having a normal three-year median payout ratio of 26% (implying that the company keeps 74% of its income) over the last three years, Dongfeng Electronic TechnologyLtd has seen a negligible amount of growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
In addition, Dongfeng Electronic TechnologyLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
Summary
Overall, we have mixed feelings about Dongfeng Electronic TechnologyLtd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Dongfeng Electronic TechnologyLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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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.