Are Robust Financials Driving The Recent Rally In Beijing-Shanghai High-Speed Railway Co., Ltd.'s (SHSE:601816) Stock?

Most readers would already be aware that Beijing-Shanghai High-Speed Railway's (SHSE:601816) stock increased significantly by 15% 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 Beijing-Shanghai High-Speed Railway'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Beijing-Shanghai High-Speed Railway

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 Beijing-Shanghai High-Speed Railway is:

5.4% = CN¥12b ÷ CN¥221b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.05 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. 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.

Beijing-Shanghai High-Speed Railway's Earnings Growth And 5.4% ROE

On the face of it, Beijing-Shanghai High-Speed Railway's ROE is not much to talk about. However, the fact that the its ROE is quite higher to the industry average of 4.2% doesn't go unnoticed by us. Still, Beijing-Shanghai High-Speed Railway has seen a flat net income growth over the past five years. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay flat.

When you consider the fact that the industry earnings have shrunk at a rate of 2.9% in the same 5-year period, the company's net income growth is pretty remarkable.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for 601816? You can find out in our latest intrinsic value infographic research report.

Is Beijing-Shanghai High-Speed Railway Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 45% (meaning the company retains55% of profits) in the last three-year period, Beijing-Shanghai High-Speed Railway's earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Beijing-Shanghai High-Speed Railway has paid dividends over a period of four years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 45% of its profits over the next three years. Still, forecasts suggest that Beijing-Shanghai High-Speed Railway's future ROE will rise to 7.3% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we are pretty happy with Beijing-Shanghai High-Speed Railway's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

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