Beijing Oriental Yuhong Waterproof Technology Co., Ltd.'s (SZSE:002271) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Beijing Oriental Yuhong Waterproof Technology (SZSE:002271) has had a great run on the share market with its stock up by a significant 38% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Beijing Oriental Yuhong Waterproof Technology'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Beijing Oriental Yuhong Waterproof Technology

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 Beijing Oriental Yuhong Waterproof Technology is:

4.5% = CN¥1.2b ÷ CN¥26b (Based on the trailing twelve months to September 2024).

The 'return' is the profit 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¥0.05 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. 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.

A Side By Side comparison of Beijing Oriental Yuhong Waterproof Technology's Earnings Growth And 4.5% ROE

It is hard to argue that Beijing Oriental Yuhong Waterproof Technology's ROE is much good in and of itself. Not just that, even compared to the industry average of 5.9%, the company's ROE is entirely unremarkable. For this reason, Beijing Oriental Yuhong Waterproof Technology's five year net income decline of 4.5% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

With the industry earnings declining at a rate of 4.5% in the same period, we deduce that both the company and the industry are shrinking at the same rate.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Beijing Oriental Yuhong Waterproof Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Beijing Oriental Yuhong Waterproof Technology Using Its Retained Earnings Effectively?

When we piece together Beijing Oriental Yuhong Waterproof Technology's low three-year median payout ratio of 18% (where it is retaining 82% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

Additionally, Beijing Oriental Yuhong Waterproof Technology has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 48% over the next three years. However, Beijing Oriental Yuhong Waterproof Technology's future ROE is expected to rise to 9.0% 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, we're a bit ambivalent about Beijing Oriental Yuhong Waterproof Technology's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.