Guangdong Lingxiao Pump Industry Co.,Ltd. (SZSE:002884) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

Guangdong Lingxiao Pump IndustryLtd (SZSE:002884) has had a rough three months with its share price down 10%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Guangdong Lingxiao Pump IndustryLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Guangdong Lingxiao Pump IndustryLtd

How Do You Calculate Return On Equity?

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 Guangdong Lingxiao Pump IndustryLtd is:

20% = CN¥434m ÷ CN¥2.2b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings 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¥0.20 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Guangdong Lingxiao Pump IndustryLtd's Earnings Growth And 20% ROE

To start with, Guangdong Lingxiao Pump IndustryLtd's ROE looks acceptable. On comparing with the average industry ROE of 6.6% the company's ROE looks pretty remarkable. This probably laid the ground for Guangdong Lingxiao Pump IndustryLtd's moderate 6.5% net income growth seen over the past five years.

As a next step, we compared Guangdong Lingxiao Pump IndustryLtd'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 7.8% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Guangdong Lingxiao Pump IndustryLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guangdong Lingxiao Pump IndustryLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 85% (or a retention ratio of 15%) for Guangdong Lingxiao Pump IndustryLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Guangdong Lingxiao Pump IndustryLtd has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with Guangdong Lingxiao Pump IndustryLtd's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.