Ganzhou Tengyuan Cobalt New Material Co., Ltd. (SZSE:301219) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Ganzhou Tengyuan Cobalt New Material's (SZSE:301219) stock is up by a considerable 24% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Ganzhou Tengyuan Cobalt New Material's ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How To 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 Ganzhou Tengyuan Cobalt New Material is:

8.8% = CN¥755m ÷ CN¥8.6b (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¥0.09 in profit.

Check out our latest analysis for Ganzhou Tengyuan Cobalt New Material

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. 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.

Ganzhou Tengyuan Cobalt New Material's Earnings Growth And 8.8% ROE

At first glance, Ganzhou Tengyuan Cobalt New Material's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 6.2%, is definitely interesting. But then again, seeing that Ganzhou Tengyuan Cobalt New Material's net income shrunk at a rate of 8.0% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

So, as a next step, we compared Ganzhou Tengyuan Cobalt New Material's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 4.2% over the last few years.

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. 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 Ganzhou Tengyuan Cobalt New Material is trading on a high P/E or a low P/E, relative to its industry.

Is Ganzhou Tengyuan Cobalt New Material Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 54% (implying that 46% of the profits are retained), most of Ganzhou Tengyuan Cobalt New Material's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. You can see the 2 risks we have identified for Ganzhou Tengyuan Cobalt New Material by visiting our risks dashboard for free on our platform here.

In addition, Ganzhou Tengyuan Cobalt New Material has been paying dividends over a period of three years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

In total, we're a bit ambivalent about Ganzhou Tengyuan Cobalt New Material's performance. Specifically, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return. Investors may have benefitted, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.