Does The Market Have A Low Tolerance For Wuxi Commercial Mansion Grand Orient Co., Ltd.'s (SHSE:600327) Mixed Fundamentals?

Simply Wall St · 03/11 22:09

Wuxi Commercial Mansion Grand Orient (SHSE:600327) has had a rough three months with its share price down 18%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Wuxi Commercial Mansion Grand Orient's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Wuxi Commercial Mansion Grand Orient

How Do You Calculate Return On Equity?

The formula for ROE is:

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:

4.3% = CN¥149m ÷ CN¥3.5b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.

Why Is ROE Important For 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 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.

Wuxi Commercial Mansion Grand Orient's Earnings Growth And 4.3% ROE

It is hard to argue that Wuxi Commercial Mansion Grand Orient's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 4.3% either. Therefore, it might not be wrong to say that the five year net income decline of 8.2% seen by Wuxi Commercial Mansion Grand Orient was possibly a result of the disappointing ROE.

From the 7.6% decline reported by the industry in the same period, we infer that Wuxi Commercial Mansion Grand Orient and its industry are both shrinking at a similar rate.

past-earnings-growth
SHSE:600327 Past Earnings Growth March 11th 2025

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Wuxi Commercial Mansion Grand Orient's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Wuxi Commercial Mansion Grand Orient Efficiently Re-investing Its Profits?

Looking at its three-year median payout ratio of 43% (or a retention ratio of 57%) which is pretty normal, Wuxi Commercial Mansion Grand Orient's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Wuxi Commercial Mansion Grand Orient has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, we're a bit ambivalent about Wuxi Commercial Mansion Grand Orient's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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. To know the 3 risks we have identified for Wuxi Commercial Mansion Grand Orient visit our risks dashboard for free.