It is hard to get excited after looking at Ganzhou Tengyuan Cobalt New Material's (SZSE:301219) recent performance, when its stock has declined 20% over the past three months. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Ganzhou Tengyuan Cobalt New Material's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

How To 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 Ganzhou Tengyuan Cobalt New Material is:

5.9% = CN¥514m ÷ CN¥8.7b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Ganzhou Tengyuan Cobalt New Material's Earnings Growth And 5.9% ROE

On the face of it, Ganzhou Tengyuan Cobalt New Material's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.3%. Having said that, Ganzhou Tengyuan Cobalt New Material's five year net income decline rate was 18%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

So, as a next step, we compared Ganzhou Tengyuan Cobalt New Material's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 7.5% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Ganzhou Tengyuan Cobalt New Material's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ganzhou Tengyuan Cobalt New Material Using Its Retained Earnings Effectively?

Looking at its three-year median payout ratio of 44% (or a retention ratio of 56%) which is pretty normal, Ganzhou Tengyuan Cobalt New Material's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Ganzhou Tengyuan Cobalt New Material only recently started paying a dividend so the management probably decided the shareholders prefer dividends even though earnings have been shrinking. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 30% over the next three years. As a result, the expected drop in Ganzhou Tengyuan Cobalt New Material's payout ratio explains the anticipated rise in the company's future ROE to 11%, over the same period.

Summary

Overall, we have mixed feelings about Ganzhou Tengyuan Cobalt New Material. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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