Guangzhou Jiacheng International Logistics Co.,Ltd.'s (SHSE:603535) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Guangzhou Jiacheng International LogisticsLtd's (SHSE:603535) stock is up by a considerable 14% over the past week. 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 Guangzhou Jiacheng International LogisticsLtd's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Guangzhou Jiacheng International LogisticsLtd

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 Guangzhou Jiacheng International LogisticsLtd is:

6.9% = CN¥175m ÷ CN¥2.5b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.

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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Guangzhou Jiacheng International LogisticsLtd's Earnings Growth And 6.9% ROE

At first glance, Guangzhou Jiacheng International LogisticsLtd's ROE doesn't look very promising. However, its ROE is similar to the industry average of 8.3%, so we won't completely dismiss the company. On the other hand, Guangzhou Jiacheng International LogisticsLtd reported a moderate 5.3% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Guangzhou Jiacheng International LogisticsLtd's reported growth was lower than the industry growth of 10% over the last few years, which is not something we like to see.

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). Doing so will help them establish if the stock's future looks promising or ominous. 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 Guangzhou Jiacheng International LogisticsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Guangzhou Jiacheng International LogisticsLtd Making Efficient Use Of Its Profits?

Guangzhou Jiacheng International LogisticsLtd's three-year median payout ratio to shareholders is 11% (implying that it retains 89% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Guangzhou Jiacheng International LogisticsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Conclusion

On the whole, we do feel that Guangzhou Jiacheng International LogisticsLtd has some positive attributes. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. 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. To know the 2 risks we have identified for Guangzhou Jiacheng International LogisticsLtd visit our risks dashboard for free.

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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.