Are Omat Advanced Materials (Guangdong) Co.,Ltd.'s (SHSE:688530) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 25% over the past three months, it is easy to disregard Omat Advanced Materials (Guangdong)Ltd (SHSE:688530). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Omat Advanced Materials (Guangdong)Ltd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Omat Advanced Materials (Guangdong)Ltd

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Omat Advanced Materials (Guangdong)Ltd is:

1.8% = CN¥16m ÷ CN¥844m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.02 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. 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.

A Side By Side comparison of Omat Advanced Materials (Guangdong)Ltd's Earnings Growth And 1.8% ROE

It is hard to argue that Omat Advanced Materials (Guangdong)Ltd's ROE is much good in and of itself. Even when compared to the industry average of 6.4%, the ROE figure is pretty disappointing. Although, we can see that Omat Advanced Materials (Guangdong)Ltd saw a modest net income growth of 19% over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Omat Advanced Materials (Guangdong)Ltd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same 5-year period.

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. Is Omat Advanced Materials (Guangdong)Ltd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Omat Advanced Materials (Guangdong)Ltd Making Efficient Use Of Its Profits?

Omat Advanced Materials (Guangdong)Ltd has a low three-year median payout ratio of 25%, meaning that the company retains the remaining 75% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Conclusion

Overall, we feel that Omat Advanced Materials (Guangdong)Ltd certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its 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. You can see the 3 risks we have identified for Omat Advanced Materials (Guangdong)Ltd by visiting our risks dashboard for free on our platform here.

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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.