Is Weakness In Guangzhou Restaurant Group Company Limited (SHSE:603043) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Guangzhou Restaurant Group (SHSE:603043) has had a rough three months with its share price down 8.2%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Guangzhou Restaurant Group's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Guangzhou Restaurant Group

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Guangzhou Restaurant Group is:

13% = CN¥541m ÷ CN¥4.1b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.13 in profit.

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 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.

Guangzhou Restaurant Group's Earnings Growth And 13% ROE

To begin with, Guangzhou Restaurant Group seems to have a respectable ROE. On comparing with the average industry ROE of 8.0% the company's ROE looks pretty remarkable. This probably laid the ground for Guangzhou Restaurant Group's moderate 7.2% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Guangzhou Restaurant Group's reported growth was lower than the industry growth of 11% over the last few years, which is not something we like to see.

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). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 603043? You can find out in our latest intrinsic value infographic research report.

Is Guangzhou Restaurant Group Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 42% (implying that the company retains 58% of its profits), it seems that Guangzhou Restaurant Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Guangzhou Restaurant Group is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 44%. Accordingly, forecasts suggest that Guangzhou Restaurant Group's future ROE will be 15% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Guangzhou Restaurant Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

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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.