Wuhu Token Sciences (SZSE:300088): ROE Analysis Reveals An Underperforming Company

Wuhu Token Sciences (SZSE:300088) stock is down 10% over the last month. Given the total market cap, small-caps tend to trade with a wider bid-ask spread and are usually more vulnerable to price movements.

However, we're interested to see if investors are ignoring a differing set of financials for the company, suggesting that the recent downturn in the stock price might be overblown.

We will be examining Wuhu Token Sciences' return on equity (ROE) today.

Return on Equity - An Introduction

ROE is a measure of a company's return on the money invested by its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

The formula used to calculate ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

Based on the above formula, Wuhu Token Sciences has an ROE of:

3.0% = CN¥264m ÷ CN¥8.9b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Put another way, for every CN¥1 worth of equity, the company was able to earn CN¥0.03 in profit.

Earnings Growth and Return on Equity

We've learned that ROE is a measure of a company's profitability. 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.

Wuhu Token Sciences' Earnings Growth and 3.0% ROE

As you can see, Wuhu Token Sciences' ROE looks very weak. Not just that, even compared to the industry average of 6.3%, the company's ROE is entirely unremarkable. For this reason, Wuhu Token Sciences' five year net income decline of 22% is not surprising given its 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 Wuhu Token Sciences' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 3.9% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. 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 Wuhu Token Sciences is trading on a high P/E or a low P/E, relative to its industry.

Wuhu Sciences Efficiently Re-investing Its Profits?

In spite of a normal three-year median payout ratio of 40% (that is, a retention ratio of 60%), the fact that Wuhu Token Sciences' earnings have shrunk is quite puzzling.

So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Wuhu Token Sciences has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

Overall, we have mixed feelings about Wuhu Token Sciences. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct.

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.

Valuation is complex, but we're here to simplify it.

Discover if Wuhu Token Sciences might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.