Most readers would already be aware that China State Construction Development Holdings’ (HKG:830) stock increased significantly by 17% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to China State Construction Development Holdings’ ROE today.
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.
View our latest analysis for China State Construction Development Holdings
How Is ROE Calculated?
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 China State Construction Development Holdings is:
16% = HK$252m ÷ HK$1.6b (Based on the trailing twelve months to June 2021).
The ‘return’ is the yearly profit. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.16 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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 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 China State Construction Development Holdings’ Earnings Growth And 16% ROE
At first glance, China State Construction Development Holdings seems to have a decent ROE. On comparing with the average industry ROE of 12% the company’s ROE looks pretty remarkable. This certainly adds some context to China State Construction Development Holdings’ decent 19% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that China State Construction Development Holdings’ growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.
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. What is 830 worth today? The intrinsic value infographic in our free research report helps visualize whether 830 is currently mispriced by the market.
Is China State Construction Development Holdings Using Its Retained Earnings Effectively?
China State Construction Development Holdings has a low three-year median payout ratio of 23%, meaning that the company retains the remaining 77% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Besides, China State Construction Development Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 38% over the next three years. Regardless, the future ROE for China State Construction Development Holdings is speculated to rise to 24% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.
Conclusion
Overall, we are quite pleased with China State Construction Development Holdings’ performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.