It is hard to get excited after looking at Wuxi Commercial Mansion Grand Orient's (SHSE:600327) recent performance, when its stock has declined 20% over the past month. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Wuxi Commercial Mansion Grand Orient's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Do You Calculate Return On Equity?

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 Wuxi Commercial Mansion Grand Orient is:

3.7% = CN¥128m ÷ CN¥3.4b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Wuxi Commercial Mansion Grand Orient's Earnings Growth And 3.7% ROE

It is hard to argue that Wuxi Commercial Mansion Grand Orient's ROE is much good in and of itself. Even when compared to the industry average of 6.8%, the ROE figure is pretty disappointing. Thus, the low net income growth of 3.6% seen by Wuxi Commercial Mansion Grand Orient over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Wuxi Commercial Mansion Grand Orient's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 3.1% in the same period.

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 Wuxi Commercial Mansion Grand Orient is trading on a high P/E or a low P/E, relative to its industry.

Is Wuxi Commercial Mansion Grand Orient Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 77% (or a retention ratio of 23%), most of Wuxi Commercial Mansion Grand Orient's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Wuxi Commercial Mansion Grand Orient 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

In total, we're a bit ambivalent about Wuxi Commercial Mansion Grand Orient's performance. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 4 risks we have identified for Wuxi Commercial Mansion Grand Orient by visiting our risks dashboard for free on our platform here.

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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.