Most readers would already be aware that Guangdong Provincial Expressway Development's (SZSE:000429) stock increased significantly by 13% 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 Guangdong Provincial Expressway Development's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Guangdong Provincial Expressway Development

How Do You 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 Guangdong Provincial Expressway Development is:

14% = CN¥1.6b ÷ CN¥12b (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.14 in profit.

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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Guangdong Provincial Expressway Development's Earnings Growth And 14% ROE

To begin with, Guangdong Provincial Expressway Development seems to have a respectable ROE. Especially when compared to the industry average of 5.6% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Guangdong Provincial Expressway Development in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Guangdong Provincial Expressway Development's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 3.8% in the same 5-year period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. What is 000429 worth today? The intrinsic value infographic in our free research report helps visualize whether 000429 is currently mispriced by the market.

Is Guangdong Provincial Expressway Development Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 69% (meaning, the company retains only 31% of profits) for Guangdong Provincial Expressway Development suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Guangdong Provincial Expressway Development has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no 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 70%. Regardless, the future ROE for Guangdong Provincial Expressway Development is predicted to rise to 17% despite there being not much change expected in its payout ratio.

Conclusion

In total, it does look like Guangdong Provincial Expressway Development has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.