Lanzhou Lishang Guochao Industrial Group Co.,Ltd's (SHSE:600738) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Lanzhou Lishang Guochao Industrial GroupLtd's (SHSE:600738) stock increased significantly by 16% 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 Lanzhou Lishang Guochao Industrial GroupLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Lanzhou Lishang Guochao Industrial GroupLtd

How Is ROE Calculated?

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 Lanzhou Lishang Guochao Industrial GroupLtd is:

5.3% = CN¥103m ÷ CN¥1.9b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.05.

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. 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.

Lanzhou Lishang Guochao Industrial GroupLtd's Earnings Growth And 5.3% ROE

On the face of it, Lanzhou Lishang Guochao Industrial GroupLtd's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 4.0% which we definitely can't overlook. However, Lanzhou Lishang Guochao Industrial GroupLtd's five year net income decline rate was 53%. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

As a next step, we compared Lanzhou Lishang Guochao Industrial GroupLtd's performance with the industry and found thatLanzhou Lishang Guochao Industrial GroupLtd's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 12% in the same period, which is a slower than the company.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Lanzhou Lishang Guochao Industrial GroupLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Lanzhou Lishang Guochao Industrial GroupLtd Making Efficient Use Of Its Profits?

Lanzhou Lishang Guochao Industrial GroupLtd's low three-year median payout ratio of 24% (or a retention ratio of 76%) 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. So there might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.

In addition, Lanzhou Lishang Guochao Industrial GroupLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we do feel that Lanzhou Lishang Guochao Industrial GroupLtd has some positive attributes. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.