COFCO Capital Holdings Co., Ltd.'s (SZSE:002423) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at COFCO Capital Holdings' (SZSE:002423) recent performance, when its stock has declined 14% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on COFCO Capital Holdings' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for COFCO Capital Holdings

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 COFCO Capital Holdings is:

6.6% = CN¥2.2b ÷ CN¥33b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. 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?

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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of COFCO Capital Holdings' Earnings Growth And 6.6% ROE

On the face of it, COFCO Capital Holdings' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.3%. Having said that, COFCO Capital Holdings has shown a modest net income growth of 13% over the past five years. 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 COFCO Capital Holdings' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 12% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if COFCO Capital Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is COFCO Capital Holdings Making Efficient Use Of Its Profits?

In COFCO Capital Holdings' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 24% (or a retention ratio of 76%), which suggests that the company is investing most of its profits to grow its business.

Besides, COFCO Capital Holdings has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that COFCO Capital Holdings certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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. 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.