Has Guangdong Dongfang Precision Science & Technology Co., Ltd.'s (SZSE:002611) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Guangdong Dongfang Precision Science & Technology's (SZSE:002611) stock is up by a considerable 93% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Guangdong Dongfang Precision Science & Technology's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Guangdong Dongfang Precision Science & Technology

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Guangdong Dongfang Precision Science & Technology is:

10% = CN¥520m ÷ CN¥5.1b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.10 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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Guangdong Dongfang Precision Science & Technology's Earnings Growth And 10% ROE

When you first look at it, Guangdong Dongfang Precision Science & Technology's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 8.3% which we definitely can't overlook. Still, Guangdong Dongfang Precision Science & Technology has seen a flat net income growth over the past five years. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the flat earnings growth.

We then compared Guangdong Dongfang Precision Science & Technology's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.2% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Guangdong Dongfang Precision Science & Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guangdong Dongfang Precision Science & Technology Efficiently Re-investing Its Profits?

Guangdong Dongfang Precision Science & Technology doesn't pay any regular dividends, which means that it is retaining all of its earnings. This makes us question why the company is retaining so much of its profits and still generating almost no growth? It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

Overall, we feel that Guangdong Dongfang Precision Science & Technology certainly does have some positive factors to consider. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Guangdong Dongfang Precision Science & Technology's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.