Are Robust Financials Driving The Recent Rally In Guobo Electronics Co., Ltd.'s (SHSE:688375) Stock?

Simply Wall St · 10/18 23:19

Guobo Electronics' (SHSE:688375) stock is up by a considerable 58% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Guobo Electronics' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Guobo Electronics

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 Guobo Electronics is:

8.7% = CN¥542m ÷ CN¥6.2b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.09.

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 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 Guobo Electronics' Earnings Growth And 8.7% ROE

At first glance, Guobo Electronics' ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 5.9% doesn't go unnoticed by us. This certainly adds some context to Guobo Electronics' moderate 14% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

We then performed a comparison between Guobo Electronics' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 17% in the same 5-year period.

past-earnings-growth
SHSE:688375 Past Earnings Growth October 18th 2024

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Guobo Electronics''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Guobo Electronics Efficiently Re-investing Its Profits?

Guobo Electronics has a three-year median payout ratio of 41%, which implies that it retains the remaining 59% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

While Guobo Electronics has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 38%. Still, forecasts suggest that Guobo Electronics' future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we are pretty happy with Guobo Electronics' performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.