Fiberhome Telecommunication Technologies Co., Ltd.’s (SHSE:600498) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?
Fiberhome Telecommunication Technologies (SHSE:600498) has had a great run on the share market with its stock up by a significant 12% over the last three months. However, we wonder if the company’s inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Fiberhome Telecommunication Technologies’ ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
See our latest analysis for Fiberhome Telecommunication Technologies
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Fiberhome Telecommunication Technologies is:
3.2% = CN¥440m ÷ CN¥14b (Based on the trailing twelve months to September 2023).
The ‘return’ is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders’ equity, the company generated CN¥0.03 in profit.
What Is The Relationship Between ROE And 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.
Fiberhome Telecommunication Technologies’ Earnings Growth And 3.2% ROE
It is hard to argue that Fiberhome Telecommunication Technologies’ ROE is much good in and of itself. Even compared to the average industry ROE of 6.4%, the company’s ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 25% seen by Fiberhome Telecommunication Technologies was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
So, as a next step, we compared Fiberhome Telecommunication Technologies’ performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 12% over the last few years.
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). 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 Fiberhome Telecommunication Technologies is trading on a high P/E or a low P/E, relative to its industry.
Is Fiberhome Telecommunication Technologies Making Efficient Use Of Its Profits?
Despite having a normal three-year median payout ratio of 32% (where it is retaining 68% of its profits), Fiberhome Telecommunication Technologies has seen a decline in earnings as we saw above. So there could be some other explanations in that regard. For instance, the company’s business may be deteriorating.
Moreover, Fiberhome Telecommunication Technologies has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Summary
On the whole, we feel that the performance shown by Fiberhome Telecommunication Technologies can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Valuation is complex, but we’re helping make it simple.
Find out whether Fiberhome Telecommunication Technologies is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
