Chongqing Baiya Sanitary Products Co., Ltd.'s (SZSE:003006) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Chongqing Baiya Sanitary Products (SZSE:003006) has had a great run on the share market with its stock up by a significant 38% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Chongqing Baiya Sanitary Products' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Chongqing Baiya Sanitary Products

How To 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 Chongqing Baiya Sanitary Products is:

17% = CN¥239m ÷ CN¥1.4b (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.17.

What Has ROE Got To Do With 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. 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.

Chongqing Baiya Sanitary Products' Earnings Growth And 17% ROE

To start with, Chongqing Baiya Sanitary Products' ROE looks acceptable. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. This probably laid the ground for Chongqing Baiya Sanitary Products' moderate 13% net income growth seen over the past five years.

We then compared Chongqing Baiya Sanitary Products' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.8% in the same 5-year period.

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. 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 Chongqing Baiya Sanitary Products is trading on a high P/E or a low P/E, relative to its industry.

Is Chongqing Baiya Sanitary Products Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 60% (or a retention ratio of 40%) for Chongqing Baiya Sanitary Products suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Chongqing Baiya Sanitary Products has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 35% over the next three years. The fact that the company's ROE is expected to rise to 27% over the same period is explained by the drop in the payout ratio.

Summary

Overall, we are quite pleased with Chongqing Baiya Sanitary Products' 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com