With its stock down 23% over the past three months, it is easy to disregard Shenzhou International Group Holdings (HKG:2313). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Shenzhou International Group Holdings' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Shenzhou International Group Holdings

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 Shenzhou International Group Holdings is:

12% = CN¥3.5b ÷ CN¥30b (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.12 in profit.

Why Is ROE Important For 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Shenzhou International Group Holdings' Earnings Growth And 12% ROE

To start with, Shenzhou International Group Holdings' ROE looks acceptable. Even when compared to the industry average of 12% the company's ROE looks quite decent. Given the circumstances, we can't help but wonder why Shenzhou International Group Holdings saw little to no growth in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

Next, on comparing Shenzhou International Group Holdings' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 1.3% in the same period.

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. Has the market priced in the future outlook for 2313? You can find out in our latest intrinsic value infographic research report.

Is Shenzhou International Group Holdings Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 51% (meaning, the company retains only 49% of profits) for Shenzhou International Group Holdings suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Shenzhou International Group Holdings 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 59% of its profits over the next three years. Still, forecasts suggest that Shenzhou International Group Holdings' future ROE will rise to 22% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we do feel that Shenzhou International Group Holdings has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.