With its stock down 7.4% over the past week, it is easy to disregard Fortior Technology (Shenzhen) (SHSE:688279). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Fortior Technology (Shenzhen)'s ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Do You Calculate Return On Equity?
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 Fortior Technology (Shenzhen) is:
7.5% = CN¥175m ÷ CN¥2.3b (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.
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. 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.
Fortior Technology (Shenzhen)'s Earnings Growth And 7.5% ROE
At first glance, Fortior Technology (Shenzhen)'s ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.2%, we may spare it some thought. Looking at Fortior Technology (Shenzhen)'s exceptional 26% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Fortior Technology (Shenzhen)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% over the last few years.
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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Fortior Technology (Shenzhen)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Fortior Technology (Shenzhen) Efficiently Re-investing Its Profits?
Fortior Technology (Shenzhen)'s three-year median payout ratio is a pretty moderate 26%, meaning the company retains 74% of its income. So it seems that Fortior Technology (Shenzhen) is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
While Fortior Technology (Shenzhen) has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 26%. Regardless, the future ROE for Fortior Technology (Shenzhen) is predicted to rise to 9.3% despite there being not much change expected in its payout ratio.
Conclusion
Overall, we feel that Fortior Technology (Shenzhen) 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.