Guangdong Shenglu Telecommunication Tech. Co., Ltd.’s (SZSE:002446) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 14% over the past three months, it is easy to disregard Guangdong Shenglu Telecommunication Tech (SZSE:002446). However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Guangdong Shenglu Telecommunication Tech’s ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

View our latest analysis for Guangdong Shenglu Telecommunication Tech

How To Calculate Return On Equity?

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 Guangdong Shenglu Telecommunication Tech is:

6.4% = CN¥214m ÷ CN¥3.3b (Based on the trailing twelve months to September 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¥0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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.

Guangdong Shenglu Telecommunication Tech’s Earnings Growth And 6.4% ROE

At first glance, Guangdong Shenglu Telecommunication Tech’s ROE doesn’t look very promising. However, its ROE is similar to the industry average of 6.4%, so we won’t completely dismiss the company. Particularly, the exceptional 23% net income growth seen by Guangdong Shenglu Telecommunication Tech over the past five years is pretty remarkable. 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. Such as – high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Guangdong Shenglu Telecommunication Tech’s growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Guangdong Shenglu Telecommunication Tech is trading on a high P/E or a low P/E, relative to its industry.

Is Guangdong Shenglu Telecommunication Tech Using Its Retained Earnings Effectively?

Guangdong Shenglu Telecommunication Tech 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

Overall, we feel that Guangdong Shenglu Telecommunication Tech certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. 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.