Should Weakness in Hangzhou Weiguang Electronic Co.,Ltd.'s (SZSE:002801) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 13% over the past month, it is easy to disregard Hangzhou Weiguang ElectronicLtd (SZSE:002801). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Hangzhou Weiguang ElectronicLtd'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Hangzhou Weiguang ElectronicLtd

How Do You Calculate Return On Equity?

ROE 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 Hangzhou Weiguang ElectronicLtd is:

7.2% = CN¥112m ÷ CN¥1.6b (Based on the trailing twelve months to March 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¥0.07 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Hangzhou Weiguang ElectronicLtd's Earnings Growth And 7.2% ROE

At first glance, Hangzhou Weiguang ElectronicLtd's ROE doesn't look very promising. However, its ROE is similar to the industry average of 6.9%, so we won't completely dismiss the company. Even so, Hangzhou Weiguang ElectronicLtd has shown a fairly decent growth in its net income which grew at a rate of 11%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Hangzhou Weiguang ElectronicLtd's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 12% in the same period.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Hangzhou Weiguang ElectronicLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hangzhou Weiguang ElectronicLtd Making Efficient Use Of Its Profits?

Hangzhou Weiguang ElectronicLtd has a three-year median payout ratio of 41%, which implies that it retains the remaining 59% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Hangzhou Weiguang ElectronicLtd is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.

Summary

Overall, we feel that Hangzhou Weiguang ElectronicLtd 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.