Are Robust Financials Driving The Recent Rally In Milkyway Chemical Supply Chain Service Co.,Ltd's (SHSE:603713) Stock?

Milkyway Chemical Supply Chain ServiceLtd (SHSE:603713) has had a great run on the share market with its stock up by a significant 50% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Milkyway Chemical Supply Chain ServiceLtd's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Milkyway Chemical Supply Chain ServiceLtd

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Milkyway Chemical Supply Chain ServiceLtd is:

12% = CN¥544m ÷ CN¥4.5b (Based on the trailing twelve months to March 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¥0.12 in profit.

Why Is ROE Important For 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 Milkyway Chemical Supply Chain ServiceLtd's Earnings Growth And 12% ROE

At first glance, Milkyway Chemical Supply Chain ServiceLtd seems to have a decent ROE. On comparing with the average industry ROE of 7.9% the company's ROE looks pretty remarkable. This certainly adds some context to Milkyway Chemical Supply Chain ServiceLtd's exceptional 24% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Milkyway Chemical Supply Chain ServiceLtd's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

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). 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 Milkyway Chemical Supply Chain ServiceLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Milkyway Chemical Supply Chain ServiceLtd Efficiently Re-investing Its Profits?

Milkyway Chemical Supply Chain ServiceLtd has a really low three-year median payout ratio of 15%, meaning that it has the remaining 85% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Milkyway Chemical Supply Chain ServiceLtd has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 16%. Regardless, the future ROE for Milkyway Chemical Supply Chain ServiceLtd is predicted to rise to 15% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we are quite pleased with Milkyway Chemical Supply Chain ServiceLtd's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.