Should Weakness in Changjiang Publishing & Media Co.,Ltd's (SHSE:600757) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

It is hard to get excited after looking at Changjiang Publishing & MediaLtd's (SHSE:600757) recent performance, when its stock has declined 9.0% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Changjiang Publishing & MediaLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Changjiang Publishing & MediaLtd

How Is ROE Calculated?

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 Changjiang Publishing & MediaLtd is:

9.3% = CN¥865m ÷ CN¥9.3b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Changjiang Publishing & MediaLtd's Earnings Growth And 9.3% ROE

When you first look at it, Changjiang Publishing & MediaLtd's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 6.5% doesn't go unnoticed by us. However, Changjiang Publishing & MediaLtd's five year net income growth was quite low averaging at only 3.3%. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Therefore, the low growth in earnings could also be the result of this.

We then performed a comparison between Changjiang Publishing & MediaLtd's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 3.3% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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. Is Changjiang Publishing & MediaLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Changjiang Publishing & MediaLtd Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 54% (or a retention ratio of 46%), most of Changjiang Publishing & MediaLtd's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Changjiang Publishing & MediaLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, we do feel that Changjiang Publishing & MediaLtd has some positive attributes. While no doubt its earnings growth is pretty decent, we do feel that the reinvestment rate is pretty low. Meaning, the earnings growth number could have been significantly higher, had the company been retaining more of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.