Most readers would already be aware that Guangzhou Grandbuy's (SZSE:002187) stock increased significantly by 8.3% over the past week. 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. Particularly, we will be paying attention to Guangzhou Grandbuy'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Guangzhou Grandbuy

How To 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 Guangzhou Grandbuy is:

0.5% = CN¥21m ÷ CN¥4.1b (Based on the trailing twelve months to September 2022).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.01 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. 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 Guangzhou Grandbuy's Earnings Growth And 0.5% ROE

It is quite clear that Guangzhou Grandbuy's ROE is rather low. Not just that, even compared to the industry average of 4.8%, the company's ROE is entirely unremarkable. Hence, the flat earnings seen by Guangzhou Grandbuy over the past five years could probably be the result of it having a lower ROE.

Given that the industry shrunk its earnings at a rate of 6.8% in the same period, the net income growth of the company is quite impressive.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Guangzhou Grandbuy's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guangzhou Grandbuy Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 51% (meaning, the company retains only 49% of profits) for Guangzhou Grandbuy suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Guangzhou Grandbuy has paid dividends over a period of at least ten 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 feel that Guangzhou Grandbuy certainly does have some positive factors to consider. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Guangzhou Grandbuy'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.