Could The Market Be Wrong About Shanghai Geoharbour Construction Group Co., Ltd. (SHSE:605598) Given Its Attractive Financial Prospects?

Shanghai Geoharbour Construction Group (SHSE:605598) has had a rough month with its share price down 17%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Shanghai Geoharbour Construction 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Shanghai Geoharbour Construction Group

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 Shanghai Geoharbour Construction Group is:

9.8% = CN¥175m ÷ CN¥1.8b (Based on the trailing twelve months to March 2024).

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.

Why Is ROE Important For 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. 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 Shanghai Geoharbour Construction Group's Earnings Growth And 9.8% ROE

At first glance, Shanghai Geoharbour Construction Group's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 7.3%, is definitely interesting. This probably goes some way in explaining Shanghai Geoharbour Construction Group's moderate 8.8% 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. So there might well be other reasons for the earnings to grow. 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.

As a next step, we compared Shanghai Geoharbour Construction Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 7.8% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Shanghai Geoharbour Construction Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shanghai Geoharbour Construction Group Using Its Retained Earnings Effectively?

In Shanghai Geoharbour Construction Group's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 9.6% (or a retention ratio of 90%), which suggests that the company is investing most of its profits to grow its business.

Along with seeing a growth in earnings, Shanghai Geoharbour Construction Group only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

Overall, we are quite pleased with Shanghai Geoharbour Construction Group's performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.