Country Garden Services Holdings’ (HKG:6098) stock is up by a considerable 49% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Country Garden Services Holdings’ ROE today.
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 Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Country Garden Services Holdings is:
33% = CN¥2.2b ÷ CN¥6.8b (Based on the trailing twelve months to June 2020).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.33 in profit.
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. 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 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.
Country Garden Services Holdings’ Earnings Growth And 33% ROE
To begin with, Country Garden Services Holdings has a pretty high ROE which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 9.5% which is quite remarkable. As a result, Country Garden Services Holdings’ exceptional 43% net income growth seen over the past five years, doesn’t come as a surprise.
Next, on comparing with the industry net income growth, we found that Country Garden Services Holdings’ growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.
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. Has the market priced in the future outlook for 6098? You can find out in our latest intrinsic value infographic research report.
Is Country Garden Services Holdings Using Its Retained Earnings Effectively?
Country Garden Services Holdings’ ‘ three-year median payout ratio is on the lower side at 20% implying that it is retaining a higher percentage (80%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
While Country Garden Services Holdings 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. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 25% over the next three years. However, the company’s ROE is not expected to change by much despite the higher expected payout ratio.
On the whole, we feel that Country Garden Services Holdings’ performance has been quite good. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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. 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.
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