Is Guangxi LiuYao Group Co., Ltd's (SHSE:603368) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Guangxi LiuYao Group's (SHSE:603368) stock increased significantly by 19% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Guangxi LiuYao Group's ROE today.

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.

Check out our latest analysis for Guangxi LiuYao Group

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 Guangxi LiuYao Group is:

12% = CN¥924m ÷ CN¥8.0b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Guangxi LiuYao Group's Earnings Growth And 12% ROE

To start with, Guangxi LiuYao Group's ROE looks acceptable. Especially when compared to the industry average of 6.5% the company's ROE looks pretty impressive. However, for some reason, the higher returns aren't reflected in Guangxi LiuYao Group's meagre five year net income growth average of 4.4%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Guangxi LiuYao Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 4.3% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 603368 worth today? The intrinsic value infographic in our free research report helps visualize whether 603368 is currently mispriced by the market.

Is Guangxi LiuYao Group Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 26% (implying that the company retains the remaining 74% of its income), Guangxi LiuYao Group's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Guangxi LiuYao Group has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we feel that Guangxi LiuYao Group's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. 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.