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Are Robust Financials Driving The Recent Rally In Guangdong Champion Asia Electronics Co.,Ltd.'s (SHSE:603386) Stock?

Simply Wall St ·  Jun 28, 2022 19:10

Guangdong Champion Asia ElectronicsLtd's (SHSE:603386) stock is up by a considerable 11% over the past week. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. Specifically, we decided to study Guangdong Champion Asia ElectronicsLtd's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Guangdong Champion Asia ElectronicsLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Guangdong Champion Asia ElectronicsLtd is:

12% = CN¥179m ÷ CN¥1.5b (Based on the trailing twelve months to March 2022).

The 'return' is the income the business earned over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.12.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Guangdong Champion Asia ElectronicsLtd's Earnings Growth And 12% ROE

To begin with, Guangdong Champion Asia ElectronicsLtd seems to have a respectable ROE. On comparing with the average industry ROE of 8.9% the company's ROE looks pretty remarkable. Probably as a result of this, Guangdong Champion Asia ElectronicsLtd was able to see an impressive net income growth of 34% over the last five years. We believe that there might also 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 Champion Asia ElectronicsLtd'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 16%.

SHSE:603386 Past Earnings Growth June 28th 2022

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

Is Guangdong Champion Asia ElectronicsLtd Efficiently Re-investing Its Profits?

The three-year median payout ratio for Guangdong Champion Asia ElectronicsLtd is 40%, which is moderately low. The company is retaining the remaining 60%. By the looks of it, the dividend is well covered and Guangdong Champion Asia ElectronicsLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Guangdong Champion Asia ElectronicsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Summary

In total, we are pretty happy with Guangdong Champion Asia ElectronicsLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 3 risks we have identified for Guangdong Champion Asia ElectronicsLtd.

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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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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