Guangzhou Grandbuy Co., Ltd.'s (SZSE:002187) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Guangzhou Grandbuy (SZSE:002187) has had a great run on the share market with its stock up by a significant 48% over the last three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Specifically, we decided to study Guangzhou Grandbuy's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Guangzhou Grandbuy

How Do You Calculate Return On Equity?

Return on equity 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 Guangzhou Grandbuy is:

1.5% = CN¥59m ÷ CN¥4.1b (Based on the trailing twelve months to September 2024).

The 'return' is the profit 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¥0.01.

What Is The Relationship Between ROE And 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. 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.

Guangzhou Grandbuy's Earnings Growth And 1.5% ROE

It is quite clear that Guangzhou Grandbuy's ROE is rather low. Even compared to the average industry ROE of 3.7%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 32% seen by Guangzhou Grandbuy was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

As a next step, we compared Guangzhou Grandbuy's performance with the industry and found thatGuangzhou Grandbuy's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 13% in the same period, which is a slower than the company.

Earnings growth is an important metric to consider when valuing a stock. 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. What is 002187 worth today? The intrinsic value infographic in our free research report helps visualize whether 002187 is currently mispriced by the market.

Is Guangzhou Grandbuy Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 78% (implying that 22% of the profits are retained), most of Guangzhou Grandbuy's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 2 risks we have identified for Guangzhou Grandbuy visit our risks dashboard for free.

In addition, Guangzhou Grandbuy 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

In total, we would have a hard think before deciding on any investment action concerning Guangzhou Grandbuy. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Guangzhou Grandbuy's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.