Guangzhou Guanggang Gases & Energy Co.,Ltd.'s (SHSE:688548) Stock Has Shown A Decent Performance: Have Financials A Role To Play?

Most readers would already know that Guangzhou Guanggang Gases & EnergyLtd's (SHSE:688548) stock increased by 4.4% over the past week. As most would know, long-term fundamentals have a strong correlation with market price movements, 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 Guangzhou Guanggang Gases & EnergyLtd'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Guangzhou Guanggang Gases & EnergyLtd

How To Calculate Return On Equity?

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:

5.4% = CN¥313m ÷ CN¥5.8b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.05 in profit.

What Is The Relationship Between ROE And 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. 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 5.4% ROE

At first glance, Guangzhou Guanggang Gases & EnergyLtd's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.4%, we may spare it some thought. Particularly, the exceptional 20% net income growth seen by Guangzhou Guanggang Gases & EnergyLtd over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For instance, the company has a low payout ratio or is being managed efficiently.

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 7.8% in the same period, which is great to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. 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 Efficiently Re-investing Its Profits?

Guangzhou Guanggang Gases & EnergyLtd has a three-year median payout ratio of 29% (where it is retaining 71% of its income) which is not too low or not too high. So it seems that Guangzhou Guanggang Gases & EnergyLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 40% over the next three years. However, Guangzhou Guanggang Gases & EnergyLtd's future ROE is expected to rise to 7.8% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

In total, it does look like Guangzhou Guanggang Gases & EnergyLtd has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.

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