Is Wah Fu Education Group Limited's (NASDAQ:WAFU) Recent Price Movement Underpinned By Its Weak Fundamentals?

By
Simply Wall St
Published
January 24, 2022
NasdaqCM:WAFU
Source: Shutterstock

It is hard to get excited after looking at Wah Fu Education Group's (NASDAQ:WAFU) recent performance, when its stock has declined 57% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Wah Fu Education Group'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Wah Fu Education Group

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Wah Fu Education Group is:

9.4% = US$1.0m ÷ US$11m (Based on the trailing twelve months to March 2021).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.09.

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. 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.

Wah Fu Education Group's Earnings Growth And 9.4% ROE

At first glance, Wah Fu Education Group's ROE doesn't look very promising. However, its ROE is similar to the industry average of 8.7%, so we won't completely dismiss the company. But Wah Fu Education Group saw a five year net income decline of 50% over the past five years. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.

However, when we compared Wah Fu Education Group's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 16% in the same period. This is quite worrisome.

past-earnings-growth
NasdaqCM:WAFU Past Earnings Growth January 24th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Wah Fu Education Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wah Fu Education Group Making Efficient Use Of Its Profits?

Because Wah Fu Education Group doesn't pay any dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

In total, we're a bit ambivalent about Wah Fu Education Group's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Wah Fu Education Group.

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