Is Weihai Guangwei Composites Co., Ltd.'s (SZSE:300699) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Weihai Guangwei Composites' (SZSE:300699) stock increased significantly by 24% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Weihai Guangwei Composites' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Weihai Guangwei Composites

How To Calculate Return On Equity?

The formula for return on equity 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¥823m ÷ CN¥5.5b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. 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?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Weihai Guangwei Composites' Earnings Growth And 15% ROE

At first glance, Weihai Guangwei Composites seems to have a decent ROE. Especially when compared to the industry average of 6.2% the company's ROE looks pretty impressive. This probably laid the ground for Weihai Guangwei Composites' moderate 11% 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 4.9% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Weihai Guangwei Composites''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Weihai Guangwei Composites Making Efficient Use Of Its Profits?

Weihai Guangwei Composites has a three-year median payout ratio of 40%, which implies that it retains the remaining 60% 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 seven years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we feel that Weihai Guangwei Composites' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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.