Most readers would already be aware that Kunshan GuoLi Electronic Technology's (SHSE:688103) stock increased significantly by 82% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Kunshan GuoLi Electronic Technology'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Kunshan GuoLi Electronic Technology
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Kunshan GuoLi Electronic Technology is:
7.9% = CN¥77m ÷ CN¥964m (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¥0.08 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 Kunshan GuoLi Electronic Technology's Earnings Growth And 7.9% ROE
On the face of it, Kunshan GuoLi Electronic Technology's ROE is not much to talk about. However, its ROE is similar to the industry average of 8.7%, so we won't completely dismiss the company. Particularly, the exceptional 35% net income growth seen by Kunshan GuoLi Electronic Technology over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Kunshan GuoLi Electronic Technology's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.SHSE:688103 Past Earnings Growth July 18th 2022
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Kunshan GuoLi Electronic Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Kunshan GuoLi Electronic Technology Making Efficient Use Of Its Profits?
Kunshan GuoLi Electronic Technology's three-year median payout ratio is a pretty moderate 34%, meaning the company retains 66% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Kunshan GuoLi Electronic Technology is reinvesting its earnings efficiently.
On the whole, we do feel that Kunshan GuoLi Electronic Technology has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 4 risks we have identified for Kunshan GuoLi Electronic Technology visit our risks dashboard for free.
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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.