Shanghai International Port (Group) Co., Ltd.'s (SHSE:600018) Stock Is Going Strong: Is the Market Following Fundamentals?

Shanghai International Port (Group) (SHSE:600018) has had a great run on the share market with its stock up by a significant 9.8% over the last week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Shanghai International Port (Group)'s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Shanghai International Port (Group)

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 Shanghai International Port (Group) is:

11% = CN¥15b ÷ CN¥142b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.11 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. 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.

Shanghai International Port (Group)'s Earnings Growth And 11% ROE

When you first look at it, Shanghai International Port (Group)'s ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 6.2%, is definitely interesting. This probably goes some way in explaining Shanghai International Port (Group)'s moderate 9.9% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Shanghai International Port (Group)'s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.0%.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Shanghai International Port (Group) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shanghai International Port (Group) Using Its Retained Earnings Effectively?

Shanghai International Port (Group)'s three-year median payout ratio to shareholders is 25% (implying that it retains 75% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Shanghai International Port (Group) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 28% of its profits over the next three years. As a result, Shanghai International Port (Group)'s ROE is not expected to change by much either, which we inferred from the analyst estimate of 9.3% for future ROE.

Conclusion

On the whole, we feel that Shanghai International Port (Group)'s performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.