# Should Weakness in Guoguang Electric Co.,Ltd.Chengdu's (SHSE:688776) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Simply Wall St ·  Dec 13, 2023 22:40

With its stock down 4.6% over the past week, it is easy to disregard Guoguang ElectricLtd.Chengdu (SHSE:688776). However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Guoguang ElectricLtd.Chengdu's ROE in this article.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Guoguang ElectricLtd.Chengdu

## How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Guoguang ElectricLtd.Chengdu is:

5.1% = CN¥91m ÷ CN¥1.8b (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 in profit.

## 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. 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 Guoguang ElectricLtd.Chengdu's Earnings Growth And 5.1% ROE

At first glance, Guoguang ElectricLtd.Chengdu's ROE doesn't look very promising. Next, when compared to the average industry ROE of 7.2%, the company's ROE leaves us feeling even less enthusiastic. However, the moderate 20% net income growth seen by Guoguang ElectricLtd.Chengdu over the past five years is definitely a positive. So, there might 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 Guoguang ElectricLtd.Chengdu'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 14%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Guoguang ElectricLtd.Chengdu fairly valued compared to other companies? These 3 valuation measures might help you decide.

## Is Guoguang ElectricLtd.Chengdu Making Efficient Use Of Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

## Conclusion

In total, it does look like Guoguang ElectricLtd.Chengdu has some positive aspects to its business. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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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.

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