Sanjiang Shopping ClubLtd's (SHSE:601116) stock is up by a considerable 8.3% over the past week. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Particularly, we will be paying attention to Sanjiang Shopping ClubLtd's ROE today.
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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Do You Calculate Return On Equity?
Return on equity 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 Sanjiang Shopping ClubLtd is:
4.2% = CN¥137m ÷ CN¥3.2b (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
A Side By Side comparison of Sanjiang Shopping ClubLtd's Earnings Growth And 4.2% ROE
It is quite clear that Sanjiang Shopping ClubLtd's ROE is rather low. Even compared to the average industry ROE of 7.3%, the company's ROE is quite dismal. Therefore, Sanjiang Shopping ClubLtd's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
We then compared Sanjiang Shopping ClubLtd's net income growth with the industry and found that the average industry growth rate was 9.7% in the same 5-year period.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 601116 fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Sanjiang Shopping ClubLtd Making Efficient Use Of 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
In total, we would have a hard think before deciding on any investment action concerning Sanjiang Shopping ClubLtd. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Sanjiang Shopping ClubLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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.