Has Guangdong Advertising Group Co.,Ltd's (SZSE:002400) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Guangdong Advertising GroupLtd's (SZSE:002400) stock is up by a considerable 41% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Guangdong Advertising GroupLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Guangdong Advertising GroupLtd

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 Guangdong Advertising GroupLtd is:

3.0% = CN¥151m ÷ CN¥5.0b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 in profit.

What Is The Relationship Between ROE And 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. 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 3.0% ROE

As you can see, Guangdong Advertising GroupLtd's ROE looks pretty weak. Even when compared to the industry average of 6.5%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Guangdong Advertising GroupLtd grew its net income at a significant rate of 30% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Guangdong Advertising GroupLtd's growth is quite high when compared to the industry average growth of 3.3% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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 Guangdong Advertising GroupLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Guangdong Advertising GroupLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Guangdong Advertising GroupLtd is 32%, which is moderately low. The company is retaining the remaining 68%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Guangdong Advertising GroupLtd is reinvesting its earnings efficiently.

Moreover, Guangdong Advertising GroupLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

On the whole, we do feel that Guangdong Advertising GroupLtd has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. You can see the 2 risks we have identified for Guangdong Advertising GroupLtd by visiting our risks dashboard for free on our platform here.

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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.