Guangxi Yuegui Guangye Holdings (SZSE:000833) has had a rough week with its share price down 12%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Guangxi Yuegui Guangye Holdings' ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Guangxi Yuegui Guangye Holdings

How To 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 Guangxi Yuegui Guangye Holdings is:

0.5% = CN¥17m ÷ CN¥3.3b (Based on the trailing twelve months to September 2023).

The 'return' is the profit 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¥0.01.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 Guangxi Yuegui Guangye Holdings' Earnings Growth And 0.5% ROE

It is quite clear that Guangxi Yuegui Guangye Holdings' ROE is rather low. Even when compared to the industry average of 3.9%, the ROE figure is pretty disappointing. In spite of this, Guangxi Yuegui Guangye Holdings was able to grow its net income considerably, at a rate of 29% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Guangxi Yuegui Guangye Holdings' growth is quite high when compared to the industry average growth of 7.7% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Guangxi Yuegui Guangye Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guangxi Yuegui Guangye Holdings Efficiently Re-investing Its Profits?

Guangxi Yuegui Guangye Holdings' three-year median payout ratio to shareholders is 16%, which is quite low. This implies that the company is retaining 84% of its profits. So it looks like Guangxi Yuegui Guangye Holdings is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Guangxi Yuegui Guangye Holdings has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that Guangxi Yuegui Guangye Holdings 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. 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 3 risks we have identified for Guangxi Yuegui Guangye Holdings 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.