With its stock down 9.9% over the past three months, it is easy to disregard Shougang Fushan Resources Group (HKG:639). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Shougang Fushan Resources Group's 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. 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 Shougang Fushan Resources Group is:
12% = HK$2.3b ÷ HK$18b (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. So, this means that for every HK$1 of its shareholder's investments, the company generates a profit of HK$0.12.
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. 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 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.
A Side By Side comparison of Shougang Fushan Resources Group's Earnings Growth And 12% ROE
To begin with, Shougang Fushan Resources Group seems to have a respectable ROE. On comparing with the average industry ROE of 9.8% the company's ROE looks pretty remarkable. Probably as a result of this, Shougang Fushan Resources Group was able to see an impressive net income growth of 22% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Shougang Fushan Resources Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 17% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. 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. What is 639 worth today? The intrinsic value infographic in our free research report helps visualize whether 639 is currently mispriced by the market.
Is Shougang Fushan Resources Group Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 77% (implying that it keeps only 23% of profits) for Shougang Fushan Resources Group suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Moreover, Shougang Fushan Resources Group 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 47% over the next three years. However, Shougang Fushan Resources Group's future ROE is expected to decline to 7.9% despite the expected decline in its payout ratio. We infer that there could be other factors that could be steering the foreseen decline in the company's ROE.
Summary
Overall, we are quite pleased with Shougang Fushan Resources Group's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.