With its stock down 12% over the past month, it is easy to disregard Sanjiang Shopping ClubLtd (SHSE:601116). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Sanjiang Shopping ClubLtd's ROE in this article.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Sanjiang Shopping ClubLtd
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sanjiang Shopping ClubLtd is:
5.1% = CN¥162m ÷ CN¥3.2b (Based on the trailing twelve months to June 2023).
The 'return' is the amount earned after tax 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¥0.05 in profit.
Why Is ROE Important For 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 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.
Sanjiang Shopping ClubLtd's Earnings Growth And 5.1% ROE
On the face of it, Sanjiang Shopping ClubLtd's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 6.3% either. As a result, Sanjiang Shopping ClubLtd's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.
As a next step, we compared Sanjiang Shopping ClubLtd's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same 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. Is Sanjiang Shopping ClubLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Sanjiang Shopping ClubLtd Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 89% (meaning, the company retains only 11% of profits) for Sanjiang Shopping ClubLtd suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.
Moreover, Sanjiang Shopping ClubLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Summary
On the whole, Sanjiang Shopping ClubLtd's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Sanjiang Shopping ClubLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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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.