China World Trade Center Co., Ltd.'s (SHSE:600007) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

Most readers would already know that China World Trade Center's (SHSE:600007) stock increased by 8.9% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on China World Trade Center'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for China World Trade Center

How To Calculate Return On Equity?

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 China World Trade Center is:

14% = CN¥1.3b ÷ CN¥9.4b (Based on the trailing twelve months to September 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¥0.14 in profit.

Why Is ROE Important For 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. 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.

China World Trade Center's Earnings Growth And 14% ROE

To start with, China World Trade Center's ROE looks acceptable. On comparing with the average industry ROE of 3.8% the company's ROE looks pretty remarkable. This probably laid the ground for China World Trade Center's moderate 8.9% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by China World Trade Center compares quite favourably to the industry average, which shows a decline of 11% 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. This then helps them determine if the stock is placed for a bright or bleak future. What is 600007 worth today? The intrinsic value infographic in our free research report helps visualize whether 600007 is currently mispriced by the market.

Is China World Trade Center Using Its Retained Earnings Effectively?

While China World Trade Center has a three-year median payout ratio of 59% (which means it retains 41% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, China World Trade Center is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 66%. Accordingly, forecasts suggest that China World Trade Center's future ROE will be 11% which is again, similar to the current ROE.

Conclusion

On the whole, we feel that China World Trade Center's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.