Is Guangxi Yuegui Guangye Holdings Co., Ltd.'s (SZSE:000833) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Guangxi Yuegui Guangye Holdings' (SZSE:000833) stock increased significantly by 20% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Guangxi Yuegui Guangye Holdings' ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View 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:

2.5% = CN¥86m ÷ CN¥3.5b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.02 in profit.

Why Is ROE Important For 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.

Guangxi Yuegui Guangye Holdings' Earnings Growth And 2.5% ROE

It is hard to argue that Guangxi Yuegui Guangye Holdings' ROE is much good in and of itself. Even compared to the average industry ROE of 5.7%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Guangxi Yuegui Guangye Holdings grew its net income at a significant rate of 20% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Guangxi Yuegui Guangye Holdings' 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 1.0%.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Guangxi Yuegui Guangye Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is Guangxi Yuegui Guangye Holdings Using Its Retained Earnings Effectively?

The three-year median payout ratio for Guangxi Yuegui Guangye Holdings is 29%, which is moderately low. The company is retaining the remaining 71%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Guangxi Yuegui Guangye Holdings is reinvesting its earnings efficiently.

Moreover, Guangxi Yuegui Guangye Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.

Conclusion

Overall, we feel that Guangxi Yuegui Guangye Holdings certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. To know the 2 risks we have identified for Guangxi Yuegui Guangye Holdings visit our risks dashboard for free.

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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.