Chengdu Galaxy Magnets Co.,Ltd.'s (SZSE:300127) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Chengdu Galaxy MagnetsLtd (SZSE:300127) has had a great run on the share market with its stock up by a significant 44% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Chengdu Galaxy MagnetsLtd's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Chengdu Galaxy MagnetsLtd

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Chengdu Galaxy MagnetsLtd is:

9.1% = CN¥129m ÷ CN¥1.4b (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¥0.09.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Chengdu Galaxy MagnetsLtd's Earnings Growth And 9.1% ROE

When you first look at it, Chengdu Galaxy MagnetsLtd's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 6.3% which we definitely can't overlook. Having said that, Chengdu Galaxy MagnetsLtd's net income growth over the past five years is more or less flat. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the low to flat growth in earnings could also be the result of this.

As a next step, we compared Chengdu Galaxy MagnetsLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 3.9% in the same period.

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 300127 worth today? The intrinsic value infographic in our free research report helps visualize whether 300127 is currently mispriced by the market.

Is Chengdu Galaxy MagnetsLtd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 78% (meaning, the company retains only 22% of profits) for Chengdu Galaxy MagnetsLtd suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Chengdu Galaxy MagnetsLtd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we're a bit ambivalent about Chengdu Galaxy MagnetsLtd's performance. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.