Are Strong Financial Prospects The Force That Is Driving The Momentum In Qingdao Gaoce Technology Co., Ltd's SHSE:688556) Stock?

Qingdao Gaoce Technology's (SHSE:688556) stock is up by a considerable 23% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Qingdao Gaoce Technology'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Qingdao Gaoce Technology

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 Qingdao Gaoce Technology is:

13% = CN¥494m ÷ CN¥3.9b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.13.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 Qingdao Gaoce Technology's Earnings Growth And 13% ROE

At first glance, Qingdao Gaoce Technology seems to have a decent ROE. On comparing with the average industry ROE of 6.4% the company's ROE looks pretty remarkable. Probably as a result of this, Qingdao Gaoce Technology was able to see an impressive net income growth of 56% over the last five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Qingdao Gaoce Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Qingdao Gaoce Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Qingdao Gaoce Technology Making Efficient Use Of Its Profits?

Qingdao Gaoce Technology has a really low three-year median payout ratio of 14%, meaning that it has the remaining 86% left over to reinvest into its business. So it looks like Qingdao Gaoce Technology is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Qingdao Gaoce Technology has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 26% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

In total, we are pretty happy with Qingdao Gaoce Technology's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.