Has Western Metal Materials Co., Ltd.'s (SZSE:002149) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Western Metal Materials' (SZSE:002149) stock is up by a considerable 6.8% over the past month. 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. In this article, we decided to focus on Western Metal Materials' ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Western Metal Materials

How Is ROE Calculated?

Return on equity 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 Western Metal Materials is:

6.5% = CN¥227m ÷ CN¥3.5b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Western Metal Materials' Earnings Growth And 6.5% ROE

At first glance, Western Metal Materials' ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.5%, so we won't completely dismiss the company. Particularly, the exceptional 25% net income growth seen by Western Metal Materials over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Western Metal Materials' growth is quite high when compared to the industry average growth of 9.8% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. 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 Western Metal Materials is trading on a high P/E or a low P/E, relative to its industry.

Is Western Metal Materials Using Its Retained Earnings Effectively?

Western Metal Materials' three-year median payout ratio is a pretty moderate 48%, meaning the company retains 52% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Western Metal Materials is reinvesting its earnings efficiently.

Besides, Western Metal Materials has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like Western Metal Materials has some positive aspects to its business. 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. 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.