Lanzhou Lishang Guochao Industrial Group Co.,Ltd's (SHSE:600738) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Lanzhou Lishang Guochao Industrial GroupLtd's (SHSE:600738) stock is up by a considerable 21% 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 an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Lanzhou Lishang Guochao Industrial GroupLtd

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 Lanzhou Lishang Guochao Industrial GroupLtd is:

5.2% = CN¥102m ÷ CN¥2.0b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

Why Is ROE Important For 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.

Lanzhou Lishang Guochao Industrial GroupLtd's Earnings Growth And 5.2% ROE

At first glance, Lanzhou Lishang Guochao Industrial GroupLtd's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 3.7% doesn't go unnoticed by us. But then again, seeing that Lanzhou Lishang Guochao Industrial GroupLtd's net income shrunk at a rate of 29% 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.

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 14% in the same period, which is a slower than the company.

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 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 Efficiently Re-investing Its Profits?

Lanzhou Lishang Guochao Industrial GroupLtd's low three-year median payout ratio of 25% (or a retention ratio of 75%) 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.

Moreover, Lanzhou Lishang Guochao Industrial GroupLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, it does look like Lanzhou Lishang Guochao Industrial GroupLtd has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the 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 would have the 3 risks we have identified for Lanzhou Lishang Guochao Industrial 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.