Has Guangdong New Grand Long Packing Co., Ltd.'s (SZSE:002836) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Guangdong New Grand Long Packing's (SZSE:002836) stock is up by a considerable 15% 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 Guangdong New Grand Long Packing'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Guangdong New Grand Long Packing

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 Guangdong New Grand Long Packing is:

15% = CN¥55m ÷ CN¥355m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned 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?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Guangdong New Grand Long Packing's Earnings Growth And 15% ROE

To start with, Guangdong New Grand Long Packing's ROE looks acceptable. On comparing with the average industry ROE of 5.4% the company's ROE looks pretty remarkable. This certainly adds some context to Guangdong New Grand Long Packing's decent 14% net income growth seen over the past five years.

When you consider the fact that the industry earnings have shrunk at a rate of 0.6% in the same 5-year period, the company's net income growth is pretty remarkable.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Guangdong New Grand Long Packing is trading on a high P/E or a low P/E, relative to its industry.

Is Guangdong New Grand Long Packing Making Efficient Use Of Its Profits?

Guangdong New Grand Long Packing's high three-year median payout ratio of 103% suggests that the company is paying out more to its shareholders than what it is making. However, this hasn't really hampered its ability to grow as we saw earlier. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates.

Additionally, Guangdong New Grand Long Packing has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we feel that Guangdong New Grand Long Packing certainly does have some positive factors to consider. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Guangdong New Grand Long Packing and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.