Most readers would already know that Guangzhou Guanggang Gases & EnergyLtd's (SHSE:688548) stock increased by 4.4% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Guangzhou Guanggang Gases & EnergyLtd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Guangzhou Guanggang Gases & EnergyLtd is:

5.4% = CN¥313m ÷ CN¥5.8b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

What Is The Relationship Between ROE And 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 Guanggang Gases & EnergyLtd's Earnings Growth And 5.4% ROE

At first glance, Guangzhou Guanggang Gases & EnergyLtd's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.4%, we may spare it some thought. Moreover, we are quite pleased to see that Guangzhou Guanggang Gases & EnergyLtd's net income grew significantly at a rate of 20% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Guangzhou Guanggang Gases & EnergyLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.8% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Guangzhou Guanggang Gases & EnergyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guangzhou Guanggang Gases & EnergyLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Guangzhou Guanggang Gases & EnergyLtd is 29%, which is moderately low. The company is retaining the remaining 71%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Guangzhou Guanggang Gases & EnergyLtd is reinvesting its earnings efficiently.

Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 40% over the next three years. Still, forecasts suggest that Guangzhou Guanggang Gases & EnergyLtd's future ROE will rise to 7.8% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Summary

Overall, we feel that Guangzhou Guanggang Gases & EnergyLtd certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com