GuiZhouYongJi PrintingLtd's (SHSE:603058) stock is up by a considerable 30% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Specifically, we decided to study GuiZhouYongJi PrintingLtd'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Is ROE Calculated?

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 GuiZhouYongJi PrintingLtd is:

9.3% = CN¥115m ÷ CN¥1.2b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

GuiZhouYongJi PrintingLtd's Earnings Growth And 9.3% ROE

When you first look at it, GuiZhouYongJi PrintingLtd's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 5.6% doesn't go unnoticed by us. But seeing GuiZhouYongJi PrintingLtd's five year net income decline of 12% over the past five years, we might rethink that. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

As a next step, we compared GuiZhouYongJi PrintingLtd's performance with the industry and found thatGuiZhouYongJi PrintingLtd's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 0.2% in the same period, which is a slower than the company.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if GuiZhouYongJi PrintingLtd is trading on a high P/E or a low P/E, relative to its industry.

Is GuiZhouYongJi PrintingLtd Using Its Retained Earnings Effectively?

GuiZhouYongJi PrintingLtd has a high three-year median payout ratio of 92% (that is, it is retaining 8.0% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 4 risks we have identified for GuiZhouYongJi PrintingLtd.

Moreover, GuiZhouYongJi PrintingLtd has been paying dividends for seven 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 would be extremely cautious before making any decision on GuiZhouYongJi PrintingLtd. Its earnings growth particularly is not much to talk about even though it does have a pretty respectable ROE. The lack of growth can be blamed on its poor earnings retention. As discussed earlier, the company is retaining hardly any of its profits. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on GuiZhouYongJi PrintingLtd and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.