Sino-Ocean Service Holding (HKG:6677) has had a rough three months with its share price down 33%. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Sino-Ocean Service Holding's 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.

Check out our latest analysis for Sino-Ocean Service Holding

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Sino-Ocean Service Holding is:

18% = CN¥441m ÷ CN¥2.4b (Based on the trailing twelve months to December 2021).

The 'return' is the income the business earned over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.18.

What Is The Relationship Between ROE And 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.

Sino-Ocean Service Holding's Earnings Growth And 18% ROE

To start with, Sino-Ocean Service Holding's ROE looks acceptable. Especially when compared to the industry average of 7.4% the company's ROE looks pretty impressive. This probably laid the ground for Sino-Ocean Service Holding's significant 31% net income growth seen over the past five years. We believe that there might also 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 Sino-Ocean Service Holding'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 16%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Sino-Ocean Service Holding fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sino-Ocean Service Holding Using Its Retained Earnings Effectively?

Sino-Ocean Service Holding has a really low three-year median payout ratio of 17%, meaning that it has the remaining 83% left over to reinvest into its business. So it looks like Sino-Ocean Service Holding is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Along with seeing a growth in earnings, Sino-Ocean Service Holding only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 26% over the next three years. Still, forecasts suggest that Sino-Ocean Service Holding's future ROE will rise to 35% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Summary

In total, we are pretty happy with Sino-Ocean Service Holding's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.