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Could The Market Be Wrong About COSCO SHIPPING Technology Co., Ltd. (SZSE:002401) Given Its Attractive Financial Prospects?

Simply Wall St ·  {{timeTz}}

It is hard to get excited after looking at COSCO SHIPPING Technology's (SZSE:002401) recent performance, when its stock has declined 10% over the past three months. 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 COSCO SHIPPING Technology's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for COSCO SHIPPING Technology

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for COSCO SHIPPING Technology is:

13% = CN¥173m ÷ CN¥1.4b (Based on the trailing twelve months to June 2022).

The 'return' is the amount earned after tax over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.13 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of COSCO SHIPPING Technology's Earnings Growth And 13% ROE

To start with, COSCO SHIPPING Technology's ROE looks acceptable. On comparing with the average industry ROE of 6.4% the company's ROE looks pretty remarkable. This certainly adds some context to COSCO SHIPPING Technology's exceptional 20% 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. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that COSCO SHIPPING Technology's growth is quite high when compared to the industry average growth of 6.4% in the same period, which is great to see.

past-earnings-growthSZSE:002401 Past Earnings Growth September 1st 2022

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if COSCO SHIPPING Technology is trading on a high P/E or a low P/E, relative to its industry.

Is COSCO SHIPPING Technology Using Its Retained Earnings Effectively?

COSCO SHIPPING Technology has a really low three-year median payout ratio of 18%, meaning that it has the remaining 82% left over to reinvest into its business. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, COSCO SHIPPING Technology is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, we are pretty happy with COSCO SHIPPING Technology'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 1 risk we have identified for COSCO SHIPPING Technology visit our risks dashboard for free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

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