Is GUOMAI Culture & Media Co., Ltd.'s (SZSE:301052) Stock Price Struggling As A Result Of Its Mixed Financials?

With its stock down 24% over the past three months, it is easy to disregard GUOMAI Culture & Media (SZSE:301052). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on GUOMAI Culture & Media'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for GUOMAI Culture & Media

How Do You 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 GUOMAI Culture & Media is:

4.6% = CN¥31m ÷ CN¥664m (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of GUOMAI Culture & Media's Earnings Growth And 4.6% ROE

It is hard to argue that GUOMAI Culture & Media's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 4.9%. Given the circumstances, the significant decline in net income by 2.0% seen by GUOMAI Culture & Media over the last five years is not surprising.

However, when we compared GUOMAI Culture & Media's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 1.8% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. 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 GUOMAI Culture & Media's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is GUOMAI Culture & Media Using Its Retained Earnings Effectively?

GUOMAI Culture & Media's low three-year median payout ratio of 13% (or a retention ratio of 87%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company's earnings have actually shrunk. This typically shouldn't be the case when a company is retaining most of its earnings. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Only recently, GUOMAI Culture & Media stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends.

Summary

Overall, we have mixed feelings about GUOMAI Culture & Media. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.