Are Foshan Golden Milky Way Intelligent Equipment Co., Ltd.'s (SZSE:300619) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 28% over the past three months, it is easy to disregard Foshan Golden Milky Way Intelligent Equipment (SZSE:300619). 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 Foshan Golden Milky Way Intelligent Equipment'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Foshan Golden Milky Way Intelligent Equipment

How Is ROE Calculated?

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 Foshan Golden Milky Way Intelligent Equipment is:

2.6% = CN¥45m ÷ CN¥1.7b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned 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¥0.03 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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Foshan Golden Milky Way Intelligent Equipment's Earnings Growth And 2.6% ROE

It is quite clear that Foshan Golden Milky Way Intelligent Equipment's ROE is rather low. Even when compared to the industry average of 7.0%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Foshan Golden Milky Way Intelligent Equipment grew its net income at a significant rate of 30% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Foshan Golden Milky Way Intelligent Equipment's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.4% in the same 5-year period.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Foshan Golden Milky Way Intelligent Equipment fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Foshan Golden Milky Way Intelligent Equipment Efficiently Re-investing Its Profits?

Foshan Golden Milky Way Intelligent Equipment has a really low three-year median payout ratio of 7.7%, meaning that it has the remaining 92% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, Foshan Golden Milky Way Intelligent Equipment is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Conclusion

On the whole, we do feel that Foshan Golden Milky Way Intelligent Equipment has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 6 risks we have identified for Foshan Golden Milky Way Intelligent Equipment visit our risks dashboard for free.

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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.