SSAW Hotels & Resorts Group Co.,Ltd.'s (SZSE:301073) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Most readers would already be aware that SSAW Hotels & Resorts GroupLtd's (SZSE:301073) stock increased significantly by 48% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study SSAW Hotels & Resorts GroupLtd's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for SSAW Hotels & Resorts GroupLtd

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 SSAW Hotels & Resorts GroupLtd is:

3.3% = CN¥32m ÷ CN¥964m (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.03.

What Has ROE Got To Do With Earnings Growth?

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

SSAW Hotels & Resorts GroupLtd's Earnings Growth And 3.3% ROE

It is hard to argue that SSAW Hotels & Resorts GroupLtd's ROE is much good in and of itself. Even compared to the average industry ROE of 8.0%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 18% seen by SSAW Hotels & Resorts GroupLtd over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

So, as a next step, we compared SSAW Hotels & Resorts GroupLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 11% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about SSAW Hotels & Resorts GroupLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is SSAW Hotels & Resorts GroupLtd Making Efficient Use Of Its Profits?

SSAW Hotels & Resorts GroupLtd has a high three-year median payout ratio of 95% (that is, it is retaining 5.4% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 3 risks we have identified for SSAW Hotels & Resorts GroupLtd visit our risks dashboard for free.

In addition, SSAW Hotels & Resorts GroupLtd has been paying dividends over a period of three years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 105%. Regardless, the future ROE for SSAW Hotels & Resorts GroupLtd is predicted to rise to 13% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, SSAW Hotels & Resorts GroupLtd's performance is quite a big let-down. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.