COFCO Capital Holdings (SZSE:002423) has had a great run on the share market with its stock up by a significant 22% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study COFCO Capital Holdings' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You Calculate Return On Equity?
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 COFCO Capital Holdings is:
7.0% = CN¥1.8b ÷ CN¥26b (Based on the trailing twelve months to September 2023).
The 'return' is the profit 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.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.
COFCO Capital Holdings' Earnings Growth And 7.0% ROE
On the face of it, COFCO Capital Holdings' ROE is not much to talk about. However, its ROE is similar to the industry average of 7.2%, so we won't completely dismiss the company. On the other hand, COFCO Capital Holdings reported a moderate 16% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared COFCO Capital Holdings' 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 12%.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 COFCO Capital Holdings is trading on a high P/E or a low P/E, relative to its industry.
Is COFCO Capital Holdings Using Its Retained Earnings Effectively?
COFCO Capital Holdings has a low three-year median payout ratio of 15%, meaning that the company retains the remaining 85% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Moreover, COFCO Capital Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.
Conclusion
On the whole, we do feel that COFCO Capital Holdings has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.