Can Wasu Media Holding Co.,Ltd's (SZSE:000156) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Wasu Media HoldingLtd's (SZSE:000156) stock is up by a considerable 21% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study Wasu Media HoldingLtd's 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Wasu Media HoldingLtd

How Do You 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 Wasu Media HoldingLtd is:

3.8% = CN¥580m ÷ CN¥15b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 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.

Wasu Media HoldingLtd's Earnings Growth And 3.8% ROE

It is quite clear that Wasu Media HoldingLtd's ROE is rather low. Not just that, even compared to the industry average of 5.5%, the company's ROE is entirely unremarkable. As a result, Wasu Media HoldingLtd's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

We then compared Wasu Media HoldingLtd's net income growth with the industry and found that the company's growth figure is a bit less than the average industry growth rate of 1.2% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Wasu Media HoldingLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Wasu Media HoldingLtd Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 51% (meaning, the company retains only 49% of profits) for Wasu Media HoldingLtd suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Wasu Media HoldingLtd has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

On the whole, Wasu Media HoldingLtd's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Wasu Media HoldingLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.