Is Shanghai Shine-Link International Logistics Co., Ltd.'s (SHSE:603648) Stock Price Struggling As A Result Of Its Mixed Financials?

With its stock down 16% over the past three months, it is easy to disregard Shanghai Shine-Link International Logistics (SHSE:603648). It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study Shanghai Shine-Link International Logistics' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. 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 Shine-Link International Logistics

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shanghai Shine-Link International Logistics is:

8.4% = CN¥153m ÷ CN¥1.8b (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.08 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.

Shanghai Shine-Link International Logistics' Earnings Growth And 8.4% ROE

When you first look at it, Shanghai Shine-Link International Logistics' ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 7.5%, we may spare it some thought. Even so, Shanghai Shine-Link International Logistics has shown a fairly decent growth in its net income which grew at a rate of 7.5%. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Shanghai Shine-Link International Logistics' reported growth was lower than the industry growth of 12% 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. 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. 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 Shine-Link International Logistics is trading on a high P/E or a low P/E, relative to its industry.

Is Shanghai Shine-Link International Logistics Efficiently Re-investing Its Profits?

While Shanghai Shine-Link International Logistics has a three-year median payout ratio of 74% (which means it retains 26% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Shanghai Shine-Link International Logistics has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that the performance shown by Shanghai Shine-Link International Logistics can be open to many interpretations. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Shanghai Shine-Link International Logistics' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.