Is GSP Automotive Group Wenzhou Co.,Ltd.'s (SHSE:605088) Latest Stock Performance A Reflection Of Its Financial Health?

GSP Automotive Group WenzhouLtd (SHSE:605088) has had a great run on the share market with its stock up by a significant 13% over the last week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to GSP Automotive Group WenzhouLtd's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out 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:

13% = CN¥301m ÷ CN¥2.3b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned 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¥0.13 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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 13% ROE

To begin with, GSP Automotive Group WenzhouLtd seems to have a respectable ROE. Especially when compared to the industry average of 8.5% the company's ROE looks pretty impressive. This certainly adds some context to GSP Automotive Group WenzhouLtd's exceptional 28% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that GSP Automotive Group WenzhouLtd's growth is quite high when compared to the industry average growth of 9.9% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about GSP Automotive Group WenzhouLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

GSP Automotive Group WenzhouLtd's three-year median payout ratio is a pretty moderate 33%, meaning the company retains 67% of its income. 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.

Moreover, GSP Automotive Group WenzhouLtd is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Summary

On the whole, we feel that GSP Automotive Group WenzhouLtd's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.