WebRAY Tech(Beijing) Co., Ltd.'s (SHSE:688651) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Most readers would already be aware that WebRAY Tech(Beijing)'s (SHSE:688651) stock increased significantly by 23% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study WebRAY Tech(Beijing)'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for WebRAY Tech(Beijing)

How Do You 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 WebRAY Tech(Beijing) is:

3.4% = CN¥32m ÷ CN¥953m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.03 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 WebRAY Tech(Beijing)'s Earnings Growth And 3.4% ROE

As you can see, WebRAY Tech(Beijing)'s ROE looks pretty weak. Even compared to the average industry ROE of 4.5%, the company's ROE is quite dismal. Although, we can see that WebRAY Tech(Beijing) saw a modest net income growth of 6.7% 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.

As a next step, we compared WebRAY Tech(Beijing)'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 1.1%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if WebRAY Tech(Beijing) is trading on a high P/E or a low P/E, relative to its industry.

Is WebRAY Tech(Beijing) Efficiently Re-investing Its Profits?

In WebRAY Tech(Beijing)'s case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 9.5% (or a retention ratio of 91%), which suggests that the company is investing most of its profits to grow its business.

While WebRAY Tech(Beijing) has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 10% of its profits over the next three years. However, WebRAY Tech(Beijing)'s ROE is predicted to rise to 11% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we feel that WebRAY Tech(Beijing) 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. Our risks dashboard will have the 1 risk we have identified for WebRAY Tech(Beijing).

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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.