Should Weakness in Kunshan GuoLi Electronic Technology Co., Ltd.'s (SHSE:688103) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Simply Wall St · Oct 13, 2023 19:32

It is hard to get excited after looking at Kunshan GuoLi Electronic Technology's (SHSE:688103) recent performance, when its stock has declined 29% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Kunshan GuoLi Electronic Technology'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 Kunshan GuoLi Electronic Technology

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 Kunshan GuoLi Electronic Technology is:

7.7% = CN¥82m ÷ CN¥1.1b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. 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?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Kunshan GuoLi Electronic Technology's Earnings Growth And 7.7% ROE

When you first look at it, Kunshan GuoLi Electronic Technology's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 7.5%, so we won't completely dismiss the company. Looking at Kunshan GuoLi Electronic Technology's exceptional 21% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

We then compared Kunshan GuoLi Electronic Technology's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same 5-year period.

past-earnings-growth — SHSE:688103 Past Earnings Growth October 13th 2023

Earnings growth is a huge factor in stock valuation. 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. 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 Kunshan GuoLi Electronic Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Kunshan GuoLi Electronic Technology Efficiently Re-investing Its Profits?

Kunshan GuoLi Electronic Technology has a three-year median payout ratio of 34% (where it is retaining 66% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Kunshan GuoLi Electronic Technology is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Kunshan GuoLi Electronic Technology has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Summary

Overall, we feel that Kunshan GuoLi Electronic Technology certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.