Do Its Financials Have Any Role To Play In Driving Guilin Layn Natural Ingredients Corp.'s (SZSE:002166) Stock Up Recently?

Most readers would already be aware that Guilin Layn Natural Ingredients' (SZSE:002166) stock increased significantly by 9.7% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Guilin Layn Natural Ingredients' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Guilin Layn Natural Ingredients

How To 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 Guilin Layn Natural Ingredients is:

4.0% = CN¥123m ÷ CN¥3.1b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 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. 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.

Guilin Layn Natural Ingredients' Earnings Growth And 4.0% ROE

As you can see, Guilin Layn Natural Ingredients' ROE looks pretty weak. Not just that, even compared to the industry average of 8.0%, the company's ROE is entirely unremarkable. Accordingly, Guilin Layn Natural Ingredients' low net income growth of 4.9% over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Guilin Layn Natural Ingredients' 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 1.6%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Guilin Layn Natural Ingredients''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guilin Layn Natural Ingredients Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 86% (or a retention ratio of 14%), most of Guilin Layn Natural Ingredients' profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Guilin Layn Natural Ingredients has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, it does look like Guilin Layn Natural Ingredients has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.