Jiangsu Seagull Cooling TowerLtd (SHSE:603269) has had a great run on the share market with its stock up by a significant 41% over the last 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 Jiangsu Seagull Cooling TowerLtd'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You 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 Jiangsu Seagull Cooling TowerLtd is:
9.7% = CN¥101m ÷ CN¥1.0b (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. 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 Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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 Jiangsu Seagull Cooling TowerLtd's Earnings Growth And 9.7% ROE
At first glance, Jiangsu Seagull Cooling TowerLtd's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 7.5% which we definitely can't overlook. This probably goes some way in explaining Jiangsu Seagull Cooling TowerLtd's moderate 20% growth over the past five years amongst other factors. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.
We then compared Jiangsu Seagull Cooling TowerLtd'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 6.5% in the same 5-year 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. 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 Jiangsu Seagull Cooling TowerLtd is trading on a high P/E or a low P/E, relative to its industry.
Is Jiangsu Seagull Cooling TowerLtd Efficiently Re-investing Its Profits?
Jiangsu Seagull Cooling TowerLtd has a healthy combination of a moderate three-year median payout ratio of 38% (or a retention ratio of 62%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Besides, Jiangsu Seagull Cooling TowerLtd has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.
Summary
Overall, we are quite pleased with Jiangsu Seagull Cooling TowerLtd's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.