Declining Stock and Decent Financials: Is The Market Wrong About Baimtec Material Co.,Ltd. (SHSE:688563)?

With its stock down 5.3% over the past three months, it is easy to disregard Baimtec MaterialLtd (SHSE:688563). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Baimtec MaterialLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Baimtec MaterialLtd

How Do You Calculate Return On Equity?

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 Baimtec MaterialLtd is:

5.0% = CN¥509m ÷ CN¥10b (Based on the trailing twelve months to September 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 Is The Relationship Between ROE And 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.

Baimtec MaterialLtd's Earnings Growth And 5.0% ROE

When you first look at it, Baimtec MaterialLtd's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 5.1%, we may spare it some thought. Particularly, the exceptional 23% net income growth seen by Baimtec MaterialLtd over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Baimtec MaterialLtd's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Baimtec MaterialLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Baimtec MaterialLtd Efficiently Re-investing Its Profits?

Baimtec MaterialLtd's three-year median payout ratio is a pretty moderate 33%, meaning the company retains 67% of its income. By the looks of it, the dividend is well covered and Baimtec MaterialLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Baimtec MaterialLtd has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

Overall, we feel that Baimtec MaterialLtd certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.