Guangxi Yuegui Guangye Holdings Co., Ltd.'s (SZSE:000833) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Guangxi Yuegui Guangye Holdings' (SZSE:000833) stock increased significantly by 160% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Guangxi Yuegui Guangye Holdings' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Guangxi Yuegui Guangye Holdings

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Guangxi Yuegui Guangye Holdings is:

6.3% = CN¥238m ÷ CN¥3.8b (Based on the trailing twelve months to September 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¥0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Guangxi Yuegui Guangye Holdings' Earnings Growth And 6.3% ROE

At first glance, Guangxi Yuegui Guangye Holdings' ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.9%. Having said that, Guangxi Yuegui Guangye Holdings has shown a modest net income growth of 16% over the past five years. 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. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Guangxi Yuegui Guangye Holdings' growth is quite high when compared to the industry average growth of 4.6% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Guangxi Yuegui Guangye Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guangxi Yuegui Guangye Holdings Using Its Retained Earnings Effectively?

Guangxi Yuegui Guangye Holdings has a healthy combination of a moderate three-year median payout ratio of 29% (or a retention ratio of 71%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Guangxi Yuegui Guangye Holdings has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we do feel that Guangxi Yuegui Guangye Holdings 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. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for Guangxi Yuegui Guangye Holdings by visiting our risks dashboard for free on our platform here.

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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.