Most readers would already be aware that Guangdong Insight Brand Marketing GroupLtd's (SZSE:300781) stock increased significantly by 147% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Guangdong Insight Brand Marketing GroupLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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 Guangdong Insight Brand Marketing GroupLtd is:

6.9% = CN¥54m ÷ CN¥780m (Based on the trailing twelve months to September 2023).

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¥0.07.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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 Guangdong Insight Brand Marketing GroupLtd's Earnings Growth And 6.9% ROE

When you first look at it, Guangdong Insight Brand Marketing GroupLtd's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.1%. But then again, Guangdong Insight Brand Marketing GroupLtd's five year net income shrunk at a rate of 12%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

However, when we compared Guangdong Insight Brand Marketing GroupLtd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 1.8% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. 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. Is Guangdong Insight Brand Marketing GroupLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guangdong Insight Brand Marketing GroupLtd Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 33% (where it is retaining 67% of its profits), Guangdong Insight Brand Marketing GroupLtd has seen a decline in earnings as we saw above. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Moreover, Guangdong Insight Brand Marketing GroupLtd has been paying dividends for five years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

Overall, we have mixed feelings about Guangdong Insight Brand Marketing GroupLtd. 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. To know the 2 risks we have identified for Guangdong Insight Brand Marketing GroupLtd 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.