With its stock down 26% over the past three months, it is easy to disregard Guangdong Fangyuan New Materials Group (SHSE:688148). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Guangdong Fangyuan New Materials Group's 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.

View our latest analysis for Guangdong Fangyuan New Materials Group

How Is ROE Calculated?

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 Guangdong Fangyuan New Materials Group is:

3.4% = CN¥46m ÷ CN¥1.4b (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. 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?

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.

A Side By Side comparison of Guangdong Fangyuan New Materials Group's Earnings Growth And 3.4% ROE

It is quite clear that Guangdong Fangyuan New Materials Group's ROE is rather low. Even when compared to the industry average of 10%, the ROE figure is pretty disappointing. In spite of this, Guangdong Fangyuan New Materials Group was able to grow its net income considerably, at a rate of 38% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Guangdong Fangyuan New Materials Group's growth is quite high when compared to the industry average growth of 19% in the same period, which is great to see.

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

Is Guangdong Fangyuan New Materials Group Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 53% (implying that it keeps only 47% of profits) for Guangdong Fangyuan New Materials Group suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Conclusion

In total, it does look like Guangdong Fangyuan New Materials Group has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.