China Science Publishing & Media Ltd.'s (SHSE:601858) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that China Science Publishing & Media's (SHSE:601858) stock increased significantly by 22% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on China Science Publishing & Media's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for China Science Publishing & Media

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for China Science Publishing & Media is:

9.0% = CN¥480m ÷ CN¥5.3b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of China Science Publishing & Media's Earnings Growth And 9.0% ROE

At first glance, China Science Publishing & Media's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 5.5%, is definitely interesting. However, China Science Publishing & Media has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the flat earnings growth.

As a next step, we compared China Science Publishing & Media's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 1.2% in the same 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. Doing so will help them establish if the stock's future looks promising or ominous. Is China Science Publishing & Media fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is China Science Publishing & Media Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 43% (implying that the company keeps 57% of its income) over the last three years, China Science Publishing & Media has seen a negligible amount of growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, China Science Publishing & Media has been paying dividends for seven years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we feel that China Science Publishing & Media certainly does have some positive factors to consider. Particularly, its earnings have grown respectably as we saw earlier, which was likely achieved due to the company reinvesting most of its earnings at a decent rate of return, to grow its business. Up till now, we've only made a short study of the company's growth data. To gain further insights into China Science Publishing & Media's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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

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.