Is Chow Tai Seng Jewellery Co., Ltd.'s (SZSE:002867) Recent Stock Performance Tethered To Its Strong Fundamentals?

Chow Tai Seng Jewellery (SZSE:002867) has had a great run on the share market with its stock up by a significant 23% over the last 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. In this article, we decided to focus on Chow Tai Seng Jewellery's ROE.

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.

View our latest analysis for Chow Tai Seng Jewellery

How To 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 Chow Tai Seng Jewellery is:

17% = CN¥1.1b ÷ CN¥6.2b (Based on the trailing twelve months to September 2024).

The 'return' is the profit 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¥0.17 in profit.

Why Is ROE Important For 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.

Chow Tai Seng Jewellery's Earnings Growth And 17% ROE

To start with, Chow Tai Seng Jewellery's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 7.1%. Probably as a result of this, Chow Tai Seng Jewellery was able to see a decent growth of 5.2% over the last five years.

Next, on comparing with the industry net income growth, we found that Chow Tai Seng Jewellery's growth is quite high when compared to the industry average growth of 2.8% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. What is 002867 worth today? The intrinsic value infographic in our free research report helps visualize whether 002867 is currently mispriced by the market.

Is Chow Tai Seng Jewellery Efficiently Re-investing Its Profits?

While Chow Tai Seng Jewellery has a three-year median payout ratio of 71% (which means it retains 29% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Chow Tai Seng Jewellery has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 65%. Accordingly, forecasts suggest that Chow Tai Seng Jewellery's future ROE will be 19% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Chow Tai Seng Jewellery's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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 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.