With its stock down 28% over the past three months, it is easy to disregard Wenfeng Great World Chain Development (SHSE:601010). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Wenfeng Great World Chain Development's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Wenfeng Great World Chain Development

How Is ROE Calculated?

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 Wenfeng Great World Chain Development is:

2.7% = CN¥127m ÷ CN¥4.7b (Based on the trailing twelve months to March 2022).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.03.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Wenfeng Great World Chain Development's Earnings Growth And 2.7% ROE

It is quite clear that Wenfeng Great World Chain Development's ROE is rather low. Even compared to the average industry ROE of 4.6%, the company's ROE is quite dismal. Hence, the flat earnings seen by Wenfeng Great World Chain Development over the past five years could probably be the result of it having a lower ROE.

Next, we compared Wenfeng Great World Chain Development's performance against the industry and found that the industry shrunk its earnings at 6.3% in the same period, which suggests that the company's earnings have been shrinking at a slower rate than its industry, This does offer shareholders some relief

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. 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 Wenfeng Great World Chain Development is trading on a high P/E or a low P/E, relative to its industry.

Is Wenfeng Great World Chain Development Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 67% (implying that the company keeps only 33% of its income) of its business to reinvest into its business), most of Wenfeng Great World Chain Development's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Wenfeng Great World Chain Development has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Wenfeng Great World Chain Development. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. To gain further insights into Wenfeng Great World Chain Development's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.