SSAW Hotels & Resorts GroupLtd's (SZSE:301073) stock is up by a considerable 54% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on SSAW Hotels & Resorts GroupLtd's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How To 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 SSAW Hotels & Resorts GroupLtd is:

4.3% = CN¥43m ÷ CN¥982m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

SSAW Hotels & Resorts GroupLtd's Earnings Growth And 4.3% ROE

As you can see, SSAW Hotels & Resorts GroupLtd's ROE looks pretty weak. Not just that, even compared to the industry average of 8.8%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 19% seen by SSAW Hotels & Resorts GroupLtd over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 12% in the same 5-year period, we still found SSAW Hotels & Resorts GroupLtd's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is SSAW Hotels & Resorts GroupLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is SSAW Hotels & Resorts GroupLtd Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 89% (implying that 11% of the profits are retained), most of SSAW Hotels & Resorts GroupLtd's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 2 risks we have identified for SSAW Hotels & Resorts GroupLtd by visiting our risks dashboard for free on our platform here.

Additionally, SSAW Hotels & Resorts GroupLtd started paying a dividend only recently. So it looks like the management may have perceived that shareholders favor dividends even though earnings have been in decline. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 76%. Regardless, the future ROE for SSAW Hotels & Resorts GroupLtd is predicted to rise to 19% despite there being not much change expected in its payout ratio.

Summary

Overall, we would be extremely cautious before making any decision on SSAW Hotels & Resorts GroupLtd. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings 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.