Shanghai Zijiang Enterprise Group's (SHSE:600210) stock is up by a considerable 30% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Shanghai Zijiang Enterprise Group's ROE in this article.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Do You Calculate Return On Equity?
ROE 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 Shanghai Zijiang Enterprise Group is:
9.8% = CN¥615m ÷ CN¥6.3b (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.10 in profit.
What Is The Relationship Between ROE And 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.
A Side By Side comparison of Shanghai Zijiang Enterprise Group's Earnings Growth And 9.8% ROE
When you first look at it, Shanghai Zijiang Enterprise Group's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 4.8% doesn't go unnoticed by us. Consequently, this likely laid the ground for the decent growth of 6.4% seen over the past five years by Shanghai Zijiang Enterprise Group. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Shanghai Zijiang Enterprise Group's growth is quite high when compared to the industry average growth of 3.0% in the same period, which is great to see.
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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Shanghai Zijiang Enterprise Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Shanghai Zijiang Enterprise Group Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 67% (or a retention ratio of 33%) for Shanghai Zijiang Enterprise Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Shanghai Zijiang Enterprise Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Summary
On the whole, we do feel that Shanghai Zijiang Enterprise Group has some positive attributes. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.