GSP Automotive Group Wenzhou Co.,Ltd.'s (SHSE:605088) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that GSP Automotive Group WenzhouLtd's (SHSE:605088) stock increased significantly by 12% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study GSP Automotive Group WenzhouLtd's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for GSP Automotive Group WenzhouLtd

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for GSP Automotive Group WenzhouLtd is:

12% = CN¥284m ÷ CN¥2.4b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of GSP Automotive Group WenzhouLtd's Earnings Growth And 12% ROE

To start with, GSP Automotive Group WenzhouLtd's ROE looks acceptable. On comparing with the average industry ROE of 8.3% the company's ROE looks pretty remarkable. This certainly adds some context to GSP Automotive Group WenzhouLtd's exceptional 27% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared GSP Automotive Group WenzhouLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.2%.

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 GSP Automotive Group WenzhouLtd is trading on a high P/E or a low P/E, relative to its industry.

Is GSP Automotive Group WenzhouLtd Making Efficient Use Of Its Profits?

The three-year median payout ratio for GSP Automotive Group WenzhouLtd is 33%, which is moderately low. The company is retaining the remaining 67%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like GSP Automotive Group WenzhouLtd is reinvesting its earnings efficiently.

Additionally, GSP Automotive Group WenzhouLtd has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that GSP Automotive Group WenzhouLtd's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable 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.