Guangdong Hongda Holdings Group Co., Ltd.'s (SZSE:002683) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

Most readers would already know that Guangdong Hongda Holdings Group's (SZSE:002683) stock increased by 7.2% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Guangdong Hongda Holdings Group's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Guangdong Hongda Holdings Group

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 Guangdong Hongda Holdings Group is:

15% = CN¥1.2b ÷ CN¥7.7b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Guangdong Hongda Holdings Group's Earnings Growth And 15% ROE

To begin with, Guangdong Hongda Holdings Group seems to have a respectable ROE. Especially when compared to the industry average of 7.5% the company's ROE looks pretty impressive. This probably laid the ground for Guangdong Hongda Holdings Group's significant 20% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Guangdong Hongda Holdings Group's 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 9.8%.

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. What is 002683 worth today? The intrinsic value infographic in our free research report helps visualize whether 002683 is currently mispriced by the market.

Is Guangdong Hongda Holdings Group Efficiently Re-investing Its Profits?

The three-year median payout ratio for Guangdong Hongda Holdings Group is 40%, which is moderately low. The company is retaining the remaining 60%. By the looks of it, the dividend is well covered and Guangdong Hongda Holdings Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Guangdong Hongda Holdings Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 35% of its profits over the next three years. Accordingly, forecasts suggest that Guangdong Hongda Holdings Group's future ROE will be 13% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Guangdong Hongda Holdings Group's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.