Should weakness in Great Wall Motor Company Limited (HKG:2333) stock be taken as a sign that the market will correct the stock price given decent financials?

With its stock down 17% over the past month, it’s easy to overlook Great Wall Motor (HKG: 2333). However, the company’s fundamentals look pretty decent and long-term financial data is generally in line with future market price movements. In this article, we decided to focus on the ROE of Great Wall Motor.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Check out our latest analysis for Great Wall Motor

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Great Wall Motor is:

10% = CN¥6.7b ÷ CN¥65b (Based on past twelve months to March 2022).

The “return” is the annual profit. This means that for every HK$1 of equity, the company generated HK$0.10 of profit.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Great Wall Motor Earnings Growth and 10% ROE

At first glance, Great Wall Motor appears to have a decent ROE. Compared to the industry average ROE of 7.7%, the company’s ROE looks quite remarkable. Given the circumstances, we can’t help but wonder why Great Wall Motor has seen little to no growth over the past five years. Therefore, there could be other aspects that could potentially impede the growth of the business. These include poor revenue retention or poor capital allocation.

Next, we compared Great Wall Motor’s performance to that of the industry and found that the industry cut profits by 5.3% over the same period, suggesting that company earnings declined at a slower rate than its industry, although it’s not particularly good, it’s not particularly bad either.

SEHK: 2333 Past Earnings Growth Aug 22, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. What is 2333 worth today? The intrinsic value infographic in our free research report visualizes whether 2333 is currently being mispriced by the market.

Does Great Wall Motor effectively reinvest its profits?

With a high three-year median payout ratio of 57% (implying that the company retains only 43% of its revenue) from its business to reinvest in its business), most of Great Wall Motor’s profits go to shareholders, which explains the lack of revenue growth.

Additionally, Great Wall Motor has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. ‘company. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 59%. Either way, Great Wall Motor’s future ROE is expected to hit 19% despite little change expected in its payout ratio.

Summary

All in all, it looks like Great Wall Motor has positives for its business. However, although the company has a high ROE, its earnings growth is quite disappointing. This can be attributed to the fact that it only reinvests a small portion of its profits and pays out the rest as dividends. That said, we have studied the latest analyst forecasts and found that although the company has decreased earnings in the past, analysts expect earnings to increase in the future. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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About Frances R. Smith

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