Guizhou Taiyong-Changzheng TechnologyLtd's (SZSE:002927) stock is up by a considerable 17% over the past week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Guizhou Taiyong-Changzheng TechnologyLtd's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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 Guizhou Taiyong-Changzheng TechnologyLtd is:

6.9% = CN¥76m ÷ CN¥1.1b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.07 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. 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. 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.

A Side By Side comparison of Guizhou Taiyong-Changzheng TechnologyLtd's Earnings Growth And 6.9% ROE

On the face of it, Guizhou Taiyong-Changzheng TechnologyLtd's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.1%. However, Guizhou Taiyong-Changzheng TechnologyLtd has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company's ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.

As a next step, we compared Guizhou Taiyong-Changzheng TechnologyLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Guizhou Taiyong-Changzheng TechnologyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Guizhou Taiyong-Changzheng TechnologyLtd Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 31% (or a retention ratio of 69%), Guizhou Taiyong-Changzheng TechnologyLtd hasn't seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Guizhou Taiyong-Changzheng TechnologyLtd has paid dividends over a period of six years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we have mixed feelings about Guizhou Taiyong-Changzheng TechnologyLtd. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Guizhou Taiyong-Changzheng TechnologyLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.