Most readers would already be aware that Science Environmental Protection's (SHSE:688480) stock increased significantly by 15% over the past week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Science Environmental Protection'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
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 Science Environmental Protection is:
9.8% = CN¥95m ÷ CN¥970m (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.10 in profit.
What Is The Relationship Between ROE And 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. 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.
Science Environmental Protection's Earnings Growth And 9.8% ROE
At first glance, Science Environmental Protection's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 5.9% doesn't go unnoticed by us. Even more so after seeing Science Environmental Protection's exceptional 23% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
Next, on comparing with the industry net income growth, we found that Science Environmental Protection's growth is quite high when compared to the industry average growth of 7.0% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Science Environmental Protection's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Science Environmental Protection Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 60% (implying that it keeps only 40% of profits) for Science Environmental Protection suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
While Science Environmental Protection has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.
Summary
In total, it does look like Science Environmental Protection has some positive aspects to its business. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.