Does Beijing Changjiu Logistics Co.,Ltd's (SHSE:603569) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Most readers would already be aware that Beijing Changjiu LogisticsLtd's (SHSE:603569) stock increased significantly by 15% over the past week. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Beijing Changjiu LogisticsLtd'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. 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 Changjiu LogisticsLtd

How Do You Calculate Return On Equity?

Return on equity 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 Changjiu LogisticsLtd is:

3.1% = CN¥100m ÷ CN¥3.2b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Beijing Changjiu LogisticsLtd's Earnings Growth And 3.1% ROE

It is hard to argue that Beijing Changjiu LogisticsLtd's ROE is much good in and of itself. Not just that, even compared to the industry average of 4.3%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 27% seen by Beijing Changjiu LogisticsLtd over the last five years is not surprising. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Beijing Changjiu LogisticsLtd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 0.09% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Changjiu LogisticsLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Beijing Changjiu LogisticsLtd Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 59% (implying that 41% of the profits are retained), most of Beijing Changjiu LogisticsLtd's profits are being paid to shareholders, which explains the company's shrinking earnings. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 2 risks we have identified for Beijing Changjiu LogisticsLtd.

In addition, Beijing Changjiu LogisticsLtd has been paying dividends over a period of seven years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Summary

Overall, we would be extremely cautious before making any decision on Beijing Changjiu LogisticsLtd. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.