Guangzhou Metro Design & Research Institute Co., Ltd. (SZSE:003013) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

Guangzhou Metro Design & Research Institute (SZSE:003013) has had a rough week with its share price down 7.0%. 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. Specifically, we decided to study Guangzhou Metro Design & Research Institute's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Guangzhou Metro Design & Research Institute

How Is ROE Calculated?

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 Guangzhou Metro Design & Research Institute is:

17% = CN¥443m ÷ CN¥2.6b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.17.

What Is The Relationship Between ROE And 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. 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.

Guangzhou Metro Design & Research Institute's Earnings Growth And 17% ROE

To begin with, Guangzhou Metro Design & Research Institute seems to have a respectable ROE. Especially when compared to the industry average of 7.3% the company's ROE looks pretty impressive. This probably laid the ground for Guangzhou Metro Design & Research Institute's moderate 14% net income growth seen over the past five years.

As a next step, we compared Guangzhou Metro Design & Research Institute's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.8%.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Guangzhou Metro Design & Research Institute's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guangzhou Metro Design & Research Institute Making Efficient Use Of Its Profits?

Guangzhou Metro Design & Research Institute has a three-year median payout ratio of 45%, which implies that it retains the remaining 55% 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, Guangzhou Metro Design & Research Institute is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Summary

On the whole, we feel that Guangzhou Metro Design & Research Institute's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.