Is Beijing-Shanghai High-Speed Railway Co., Ltd.'s (SHSE:601816) Recent Stock Performance Tethered To Its Strong Fundamentals?

Beijing-Shanghai High-Speed Railway (SHSE:601816) has had a great run on the share market with its stock up by a significant 12% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Beijing-Shanghai High-Speed Railway's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Beijing-Shanghai High-Speed Railway

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 Beijing-Shanghai High-Speed Railway is:

5.6% = CN¥13b ÷ CN¥223b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned 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¥0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Beijing-Shanghai High-Speed Railway's Earnings Growth And 5.6% ROE

At first glance, Beijing-Shanghai High-Speed Railway's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 4.4%, is definitely interesting. This certainly adds some context to Beijing-Shanghai High-Speed Railway's moderate 14% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

Given that the industry shrunk its earnings at a rate of 0.6% over the last few years, the net income growth of the company is quite impressive.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 601816 worth today? The intrinsic value infographic in our free research report helps visualize whether 601816 is currently mispriced by the market.

Is Beijing-Shanghai High-Speed Railway Efficiently Re-investing Its Profits?

Beijing-Shanghai High-Speed Railway has a three-year median payout ratio of 43%, which implies that it retains the remaining 57% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Beijing-Shanghai High-Speed Railway is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 48% 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.

Summary

On the whole, we feel that Beijing-Shanghai High-Speed Railway's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.