Are Robust Financials Driving The Recent Rally In Beijing Caishikou Department Store Co.,Ltd.'s (SHSE:605599) Stock?

Beijing Caishikou Department StoreLtd's (SHSE:605599) stock is up by a considerable 17% over the past month. 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 Beijing Caishikou Department StoreLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Beijing Caishikou Department StoreLtd

How Do You 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 Beijing Caishikou Department StoreLtd is:

19% = CN¥698m ÷ CN¥3.7b (Based on the trailing twelve months to June 2024).

The 'return' is the profit 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¥0.19.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Beijing Caishikou Department StoreLtd's Earnings Growth And 19% ROE

To start with, Beijing Caishikou Department StoreLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 4.6%. This certainly adds some context to Beijing Caishikou Department StoreLtd's decent 19% 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 Beijing Caishikou Department StoreLtd compares quite favourably to the industry average, which shows a decline of 3.2% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Beijing Caishikou Department StoreLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Beijing Caishikou Department StoreLtd Using Its Retained Earnings Effectively?

Beijing Caishikou Department StoreLtd has a significant three-year median payout ratio of 70%, meaning that it is left with only 30% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Along with seeing a growth in earnings, Beijing Caishikou Department StoreLtd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 63% of its profits over the next three years. As a result, Beijing Caishikou Department StoreLtd's ROE is not expected to change by much either, which we inferred from the analyst estimate of 20% for future ROE.

Summary

On the whole, we feel that Beijing Caishikou Department StoreLtd's performance has been quite good. 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. 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.