Is Weihai Guangwei Composites Co., Ltd.'s (SZSE:300699) Recent Stock Performance Tethered To Its Strong Fundamentals?

Weihai Guangwei Composites (SZSE:300699) has had a great run on the share market with its stock up by a significant 5.5% over the last week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Weihai Guangwei Composites' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Weihai Guangwei Composites

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Weihai Guangwei Composites is:

15% = CN¥826m ÷ CN¥5.5b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.15.

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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Weihai Guangwei Composites' Earnings Growth And 15% ROE

To start with, Weihai Guangwei Composites' ROE looks acceptable. Especially when compared to the industry average of 6.3% the company's ROE looks pretty impressive. This probably laid the ground for Weihai Guangwei Composites' moderate 13% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Weihai Guangwei Composites' growth is quite high when compared to the industry average growth of 8.1% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Weihai Guangwei Composites fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Weihai Guangwei Composites Making Efficient Use Of Its Profits?

Weihai Guangwei Composites has a three-year median payout ratio of 38%, which implies that it retains the remaining 62% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Weihai Guangwei Composites has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Weihai Guangwei Composites' 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, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.