Qian Jiang Water Resources Development Co.,Ltd's (SHSE:600283) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Simply Wall St · Jul 8, 2023 06:47

Qian Jiang Water Resources DevelopmentLtd (SHSE:600283) has had a great run on the share market with its stock up by a significant 26% over the last 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. In this article, we decided to focus on Qian Jiang Water Resources DevelopmentLtd's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Qian Jiang Water Resources DevelopmentLtd

How To 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 Qian Jiang Water Resources DevelopmentLtd is:

9.3% = CN¥270m ÷ CN¥2.9b (Based on the trailing twelve months to March 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.09 in profit.

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. 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. 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 Qian Jiang Water Resources DevelopmentLtd's Earnings Growth And 9.3% ROE

On the face of it, Qian Jiang Water Resources DevelopmentLtd's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.8%. Particularly, the exceptional 25% net income growth seen by Qian Jiang Water Resources DevelopmentLtd over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Qian Jiang Water Resources DevelopmentLtd's growth is quite high when compared to the industry average growth of 8.7% in the same period, which is great to see.

past-earnings-growth — SHSE:600283 Past Earnings Growth July 7th 2023

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Qian Jiang Water Resources DevelopmentLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Qian Jiang Water Resources DevelopmentLtd Using Its Retained Earnings Effectively?

The three-year median payout ratio for Qian Jiang Water Resources DevelopmentLtd is 33%, which is moderately low. The company is retaining the remaining 67%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Qian Jiang Water Resources DevelopmentLtd is reinvesting its earnings efficiently.

Moreover, Qian Jiang Water Resources DevelopmentLtd 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.

Conclusion

Overall, we feel that Qian Jiang Water Resources DevelopmentLtd certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. 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. You can see the 2 risks we have identified for Qian Jiang Water Resources DevelopmentLtd by visiting our risks dashboard for free on our platform here.

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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.