Are Gansu Guofang Industry & Trade (Group) Co., Ltd.'s (SHSE:601086) Mixed Financials Driving The Negative Sentiment?

Gansu Guofang Industry & Trade (Group) (SHSE:601086) has had a rough month with its share price down 24%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study Gansu Guofang Industry & Trade (Group)'s ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Gansu Guofang Industry & Trade (Group)

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Gansu Guofang Industry & Trade (Group) is:

4.2% = CN¥65m ÷ CN¥1.5b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Gansu Guofang Industry & Trade (Group)'s Earnings Growth And 4.2% ROE

As you can see, Gansu Guofang Industry & Trade (Group)'s ROE looks pretty weak. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 3.7%. Therefore, the low net income growth of 4.5% seen by Gansu Guofang Industry & Trade (Group) over the past five years could probably be the result of it having a lower ROE.

When you consider the fact that the industry earnings have shrunk at a rate of 14% in the same 5-year period, the company's net income growth is pretty remarkable.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Gansu Guofang Industry & Trade (Group)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Gansu Guofang Industry & Trade (Group) Using Its Retained Earnings Effectively?

Gansu Guofang Industry & Trade (Group) has a very high three-year median payout ratio of 112%suggesting that the company's shareholders are getting paid from more than just the company's income. That's a huge risk in our books. To know the 4 risks we have identified for Gansu Guofang Industry & Trade (Group) visit our risks dashboard for free.

In addition, Gansu Guofang Industry & Trade (Group) has been paying dividends over a period of seven 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

Overall, we have mixed feelings about Gansu Guofang Industry & Trade (Group). Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Gansu Guofang Industry & Trade (Group) and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.