Most readers would already be aware that Glodon's (SZSE:002410) stock increased significantly by 47% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Glodon's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How To 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 Glodon is:

1.1% = CN¥70m ÷ CN¥6.5b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.01 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of Glodon's Earnings Growth And 1.1% ROE

It is hard to argue that Glodon's ROE is much good in and of itself. Not just that, even compared to the industry average of 4.5%, the company's ROE is entirely unremarkable. As a result, Glodon's flat earnings over the past five years doesn't come as a surprise given its lower ROE.

As a next step, we compared Glodon'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 1.1%.

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. What is 002410 worth today? The intrinsic value infographic in our free research report helps visualize whether 002410 is currently mispriced by the market.

Is Glodon Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 53% (meaning, the company retains only 47% of profits) for Glodon suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Glodon has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 51%. Still, forecasts suggest that Glodon's future ROE will rise to 13% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we feel that Glodon certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.