Do Its Financials Have Any Role To Play In Driving Qian Jiang Water Resources Development Co.,Ltd's (SHSE:600283) Stock Up Recently?

Simply Wall St · Oct 26, 2023 06:15

Qian Jiang Water Resources DevelopmentLtd's (SHSE:600283) stock is up by a considerable 13% over the past week. 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 Qian Jiang Water Resources DevelopmentLtd'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Qian Jiang Water Resources DevelopmentLtd

How To Calculate Return On Equity?

The formula for return on equity is:

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:

9.0% = CN¥258m ÷ CN¥2.9b (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. 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.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 9.0% ROE

When you first look at it, Qian Jiang Water Resources DevelopmentLtd's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 8.9%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Qian Jiang Water Resources DevelopmentLtd's net income grew significantly at a rate of 27% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

We then compared Qian Jiang Water Resources DevelopmentLtd'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 4.0% in the same 5-year period.

past-earnings-growth — SHSE:600283 Past Earnings Growth October 25th 2023

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Efficiently Re-investing Its Profits?

Qian Jiang Water Resources DevelopmentLtd has a three-year median payout ratio of 31% (where it is retaining 69% of its income) which is not too low or not too high. So it seems that Qian Jiang Water Resources DevelopmentLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Qian Jiang Water Resources DevelopmentLtd 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

Overall, we feel that Qian Jiang Water Resources DevelopmentLtd certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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. Our risks dashboard would have the 2 risks we have identified for Qian Jiang Water Resources DevelopmentLtd.

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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.