Has Hebei Broadcasting Wireless Media Co., Ltd.'s (SZSE:301551) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Hebei Broadcasting Wireless Media's (SZSE:301551) stock increased significantly by 29% over the past month. 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 Hebei Broadcasting Wireless Media's ROE today.

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.

Check out our latest analysis for Hebei Broadcasting Wireless Media

How To Calculate Return On Equity?

ROE 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 Hebei Broadcasting Wireless Media is:

10% = CN¥253m ÷ CN¥2.4b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.10 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. 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. 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.

Hebei Broadcasting Wireless Media's Earnings Growth And 10% ROE

On the face of it, Hebei Broadcasting Wireless Media's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.5%, is definitely interesting. But then again, seeing that Hebei Broadcasting Wireless Media's net income shrunk at a rate of 5.7% in the past five years, makes us think again. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Therefore, the decline in earnings could also be the result of this.

However, when we compared Hebei Broadcasting Wireless 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 3.3% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Hebei Broadcasting Wireless Media's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hebei Broadcasting Wireless Media Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 43% (that is, a retention ratio of 57%), the fact that Hebei Broadcasting Wireless Media's earnings have shrunk is quite puzzling. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Conclusion

In total, it does look like Hebei Broadcasting Wireless Media has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. 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 would have the 2 risks we have identified for Hebei Broadcasting Wireless Media.

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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.