Can Mixed Fundamentals Have A Negative Impact on Kunshan GuoLi Electronic Technology Co., Ltd. (SHSE:688103) Current Share Price Momentum?

Kunshan GuoLi Electronic Technology (SHSE:688103) has had a great run on the share market with its stock up by a significant 32% over the last week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Kunshan GuoLi Electronic Technology's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Kunshan GuoLi Electronic Technology

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Kunshan GuoLi Electronic Technology is:

4.6% = CN¥51m ÷ CN¥1.1b (Based on the trailing twelve months to June 2024).

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¥0.05 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. 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.

Kunshan GuoLi Electronic Technology's Earnings Growth And 4.6% ROE

As you can see, Kunshan GuoLi Electronic Technology's ROE looks pretty weak. Even compared to the average industry ROE of 6.9%, the company's ROE is quite dismal. For this reason, Kunshan GuoLi Electronic Technology's five year net income decline of 12% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

That being said, we compared Kunshan GuoLi Electronic Technology's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 12% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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 Kunshan GuoLi Electronic Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kunshan GuoLi Electronic Technology Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 34% (where it is retaining 66% of its profits), Kunshan GuoLi Electronic Technology 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.

Only recently, Kunshan GuoLi Electronic Technology stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends.

Conclusion

On the whole, we feel that the performance shown by Kunshan GuoLi Electronic Technology 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. 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. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.