Shanghai Geoharbour Construction Group Co., Ltd.'s (SHSE:605598) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Shanghai Geoharbour Construction Group's (SHSE:605598) stock increased significantly by 24% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. 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.

View our latest analysis for Shanghai Geoharbour Construction Group

How Is ROE Calculated?

ROE 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:

7.4% = CN¥137m ÷ CN¥1.9b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.07 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 7.4% ROE

On the face of it, Shanghai Geoharbour Construction Group's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.9%. Even so, Shanghai Geoharbour Construction Group has shown a fairly decent growth in its net income which grew at a rate of 7.2%. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Shanghai Geoharbour Construction Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 6.4% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Shanghai Geoharbour Construction Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai Geoharbour Construction Group Efficiently Re-investing Its Profits?

In Shanghai Geoharbour Construction Group's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 10% (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.

Conclusion

On the whole, we do feel that Shanghai Geoharbour Construction Group has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

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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.