Guobo Electronics Co., Ltd.'s (SHSE:688375) Stock Has Shown A Decent Performance: Have Financials A Role To Play?

Guobo Electronics' (SHSE:688375) stock up by 7.0% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Specifically, we decided to study Guobo Electronics' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Guobo Electronics

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 Guobo Electronics is:

10.0% = CN¥611m ÷ CN¥6.1b (Based on the trailing twelve months to March 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¥0.10.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Guobo Electronics' Earnings Growth And 10.0% ROE

At first glance, Guobo Electronics' ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 5.8% doesn't go unnoticed by us. Consequently, this likely laid the ground for the decent growth of 16% seen over the past five years by Guobo Electronics. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

As a next step, we compared Guobo Electronics' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 20% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Guobo Electronics fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guobo Electronics Making Efficient Use Of Its Profits?

Guobo Electronics has a healthy combination of a moderate three-year median payout ratio of 41% (or a retention ratio of 59%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Along with seeing a growth in earnings, Guobo Electronics only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 34%. Regardless, the future ROE for Guobo Electronics is predicted to rise to 13% despite there being not much change expected in its payout ratio.

Conclusion

In total, it does look like Guobo Electronics has some positive aspects to its business. Particularly, its earnings have grown respectably as we saw earlier, which was likely achieved due to the company reinvesting most of its earnings at a decent rate of return, to grow its business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.