It is hard to get excited after looking at Gansu Yasheng Industrial (Group)'s (SHSE:600108) recent performance, when its stock has declined 10% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Gansu Yasheng Industrial (Group)'s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You 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 Gansu Yasheng Industrial (Group) is:

2.4% = CN¥99m ÷ CN¥4.2b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.02.

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. 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.

Gansu Yasheng Industrial (Group)'s Earnings Growth And 2.4% ROE

It is quite clear that Gansu Yasheng Industrial (Group)'s ROE is rather low. Even when compared to the industry average of 8.1%, the ROE figure is pretty disappointing. However, the moderate 15% net income growth seen by Gansu Yasheng Industrial (Group) over the past five years is definitely a positive. We believe that there might be 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.

As a next step, we compared Gansu Yasheng Industrial (Group)'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 2.9%.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Gansu Yasheng Industrial (Group)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Gansu Yasheng Industrial (Group) Efficiently Re-investing Its Profits?

Gansu Yasheng Industrial (Group) has a low three-year median payout ratio of 10%, meaning that the company retains the remaining 90% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Gansu Yasheng Industrial (Group) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that Gansu Yasheng Industrial (Group) 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. You can see the 2 risks we have identified for Gansu Yasheng Industrial (Group) by visiting our risks dashboard for free on our platform here.

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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.