It is hard to get excited after looking at China Railway Materials' (SZSE:000927) recent performance, when its stock has declined 7.6% over the past three months. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to China Railway Materials' ROE today.
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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for China Railway Materials
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 China Railway Materials is:
7.4% = CN¥716m ÷ CN¥9.7b (Based on the trailing twelve months to March 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.07.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
China Railway Materials' Earnings Growth And 7.4% ROE
When you first look at it, China Railway Materials' ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 5.4% doesn't go unnoticed by us. But then again, seeing that China Railway Materials' net income shrunk at a rate of 13% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to shrink.
So, as a next step, we compared China Railway Materials' performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 4.1% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. 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 China Railway Materials is trading on a high P/E or a low P/E, relative to its industry.
Is China Railway Materials Making Efficient Use Of Its Profits?
China Railway Materials doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn't explain why the company's earnings have shrunk if it is retaining all of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Conclusion
On the whole, we do feel that China Railway Materials has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for China Railway Materials.
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China Railway Materialsは配当を一切支払いません。つまり、利益のすべてが事業に再投資されている可能性があるということです。これは、利益をすべて維持しているのに会社の収益が減少した理由を説明していません。その点で不足を説明する理由は他にもあるようです。たとえば、ビジネスが衰退している可能性があります。