Guangdong Silver Age Sci & TechLtd (SZSE:300221) has had a great run on the share market with its stock up by a significant 52% over the last 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. In this article, we decided to focus on Guangdong Silver Age Sci & TechLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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 Guangdong Silver Age Sci & TechLtd is:

2.7% = CN¥37m ÷ CN¥1.3b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.03 in profit.

What Is The Relationship Between ROE And 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. 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.

Guangdong Silver Age Sci & TechLtd's Earnings Growth And 2.7% ROE

It is hard to argue that Guangdong Silver Age Sci & TechLtd's ROE is much good in and of itself. Even compared to the average industry ROE of 6.4%, the company's ROE is quite dismal. In spite of this, Guangdong Silver Age Sci & TechLtd was able to grow its net income considerably, at a rate of 68% 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.

As a next step, we compared Guangdong Silver Age Sci & TechLtd'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 6.2%.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Guangdong Silver Age Sci & TechLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guangdong Silver Age Sci & TechLtd Using Its Retained Earnings Effectively?

Guangdong Silver Age Sci & TechLtd doesn't pay any regular dividends to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

In total, it does look like Guangdong Silver Age Sci & TechLtd has some positive aspects to its business. 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. Our risks dashboard will have the 1 risk we have identified for Guangdong Silver Age Sci & TechLtd.

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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.