Guangdong Advertising Group Co.,Ltd's (SZSE:002400) Stock Is Going Strong: Have Financials A Role To Play?

Guangdong Advertising GroupLtd (SZSE:002400) has had a great run on the share market with its stock up by a significant 6.5% over the last week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Guangdong Advertising GroupLtd's 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 Guangdong Advertising GroupLtd

How Do You Calculate Return On Equity?

Return on equity 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 Advertising GroupLtd is:

2.7% = CN¥133m ÷ CN¥5.0b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.03 in profit.

Why Is ROE Important For Earnings Growth?

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

Guangdong Advertising GroupLtd's Earnings Growth And 2.7% ROE

It is hard to argue that Guangdong Advertising GroupLtd's ROE is much good in and of itself. Not just that, even compared to the industry average of 5.2%, the company's ROE is entirely unremarkable. In spite of this, Guangdong Advertising GroupLtd was able to grow its net income considerably, at a rate of 23% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Guangdong Advertising GroupLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 3.4%.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Guangdong Advertising GroupLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guangdong Advertising GroupLtd Making Efficient Use Of Its Profits?

The three-year median payout ratio for Guangdong Advertising GroupLtd is 33%, which is moderately low. The company is retaining the remaining 67%. By the looks of it, the dividend is well covered and Guangdong Advertising GroupLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Guangdong Advertising GroupLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that Guangdong Advertising GroupLtd certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Guangdong Advertising GroupLtd.

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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.