Most readers would already be aware that Guilin Layn Natural Ingredients' (SZSE:002166) stock increased significantly by 10% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Guilin Layn Natural Ingredients' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Do You Calculate Return On Equity?

Return on equity 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 Guilin Layn Natural Ingredients is:

4.9% = CN¥151m ÷ CN¥3.1b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Guilin Layn Natural Ingredients' Earnings Growth And 4.9% ROE

On the face of it, Guilin Layn Natural Ingredients' ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 7.6% either. As a result, Guilin Layn Natural Ingredients reported a very low income growth of 4.1% over the past five years.

Next, on comparing with the industry net income growth, we found that Guilin Layn Natural Ingredients' growth is quite high when compared to the industry average growth of 2.5% in the same period, which is great to see.

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). Doing so will help them establish if the stock's future looks promising or ominous. 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 Guilin Layn Natural Ingredients is trading on a high P/E or a low P/E, relative to its industry.

Is Guilin Layn Natural Ingredients Efficiently Re-investing Its Profits?

Guilin Layn Natural Ingredients' very high three-year median payout ratio of 109% suggests that the company is paying its shareholders more than what it is earning and it definitely contributes to the low earnings growth seen by the company. That's a huge risk in our books. Our risks dashboard should have the 2 risks we have identified for Guilin Layn Natural Ingredients.

Additionally, Guilin Layn Natural Ingredients has paid dividends over a period of nine years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we're a bit ambivalent about Guilin Layn Natural Ingredients' performance. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. 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.