China-Singapore Suzhou Industrial Park Development Group's (SHSE:601512) stock is up by 8.5% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on China-Singapore Suzhou Industrial Park Development Group'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 China-Singapore Suzhou Industrial Park Development Group is:
8.0% = CN¥1.5b ÷ CN¥19b (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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 China-Singapore Suzhou Industrial Park Development Group's Earnings Growth And 8.0% ROE
On the face of it, China-Singapore Suzhou Industrial Park Development Group's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 4.8%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 8.7% seen over the past five years by China-Singapore Suzhou Industrial Park Development Group. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.
When you consider the fact that the industry earnings have shrunk at a rate of 6.5% in the same 5-year period, the company's net income growth is pretty remarkable.
Earnings growth is an important metric to consider when valuing a stock. 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 China-Singapore Suzhou Industrial Park Development Group is trading on a high P/E or a low P/E, relative to its industry.
Is China-Singapore Suzhou Industrial Park Development Group Using Its Retained Earnings Effectively?
China-Singapore Suzhou Industrial Park Development Group has a three-year median payout ratio of 31%, which implies that it retains the remaining 69% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Moreover, China-Singapore Suzhou Industrial Park Development Group is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.
Summary
Overall, we are quite pleased with China-Singapore Suzhou Industrial Park Development Group's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.