Shanghai @hub Co.,Ltd.'s (SHSE:603881) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Shanghai @hubLtd (SHSE:603881) has had a great run on the share market with its stock up by a significant 98% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Shanghai @hubLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Shanghai @hubLtd

How Is ROE Calculated?

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 Shanghai @hubLtd is:

3.9% = CN¥126m ÷ CN¥3.2b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.04 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Shanghai @hubLtd's Earnings Growth And 3.9% ROE

As you can see, Shanghai @hubLtd's ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 4.6%. The flat earnings by Shanghai @hubLtd over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Shanghai @hubLtd's reported growth was lower than the industry growth of 2.5% over the last few years, which is not something we like to see.

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. 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 Shanghai @hubLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Shanghai @hubLtd Using Its Retained Earnings Effectively?

Shanghai @hubLtd has a low three-year median payout ratio of 12% (or a retention ratio of 88%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Shanghai @hubLtd has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 31% over the next three years. Still, forecasts suggest that Shanghai @hubLtd's future ROE will rise to 6.7% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Summary

Overall, we have mixed feelings about Shanghai @hubLtd. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.