GKG Precision Machine Co., Ltd. (SZSE:301338) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Most readers would already be aware that GKG Precision Machine's (SZSE:301338) stock increased significantly by 39% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to GKG Precision Machine'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.

See our latest analysis for GKG Precision Machine

How To 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 GKG Precision Machine is:

3.7% = CN¥54m ÷ CN¥1.4b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 in profit.

Why Is ROE Important For 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. 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.

GKG Precision Machine's Earnings Growth And 3.7% ROE

As you can see, GKG Precision Machine's ROE looks pretty weak. Even when compared to the industry average of 6.9%, the ROE figure is pretty disappointing. Therefore, GKG Precision Machine's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared GKG Precision Machine's net income growth with the industry and discovered that the industry saw an average growth of 9.5% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is GKG Precision Machine fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is GKG Precision Machine Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 33% (implying that the company keeps 67% of its income) over the last three years, GKG Precision Machine has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Only recently, GKG Precision Machine started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.

Conclusion

In total, we're a bit ambivalent about GKG Precision Machine's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. You can do your own research on GKG Precision Machine and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.

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