Do Its Financials Have Any Role To Play In Driving Guangzhou Guanggang Gases & Energy Co.,Ltd.'s (SHSE:688548) Stock Up Recently?

Guangzhou Guanggang Gases & EnergyLtd (SHSE:688548) has had a great run on the share market with its stock up by a significant 27% over the last three months. 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. In this article, we decided to focus on Guangzhou Guanggang Gases & EnergyLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Guangzhou Guanggang Gases & EnergyLtd

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 Guangzhou Guanggang Gases & EnergyLtd is:

4.7% = CN¥277m ÷ CN¥5.9b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

What Is The Relationship Between ROE And 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.

Guangzhou Guanggang Gases & EnergyLtd's Earnings Growth And 4.7% ROE

As you can see, Guangzhou Guanggang Gases & EnergyLtd's ROE looks pretty weak. Even when compared to the industry average of 6.2%, the ROE figure is pretty disappointing. Guangzhou Guanggang Gases & EnergyLtd was still able to see a decent net income growth of 16% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Guangzhou Guanggang Gases & EnergyLtd's growth is quite high when compared to the industry average growth of 4.9% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Guangzhou Guanggang Gases & EnergyLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guangzhou Guanggang Gases & EnergyLtd Making Efficient Use Of Its Profits?

Guangzhou Guanggang Gases & EnergyLtd has a healthy combination of a moderate three-year median payout ratio of 33% (or a retention ratio of 67%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Along with seeing a growth in earnings, Guangzhou Guanggang Gases & EnergyLtd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 30% of its profits over the next three years. Still, forecasts suggest that Guangzhou Guanggang Gases & EnergyLtd's future ROE will rise to 8.0% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we do feel that Guangzhou Guanggang Gases & EnergyLtd has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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.